Government-sponsored enterprises--Freddie Mac, Fannie Mae and the Federal Home Loan Banks--have become a potent force in helping develop affordable housing. That helps lenders, and it's good business for the GSEs.
There's a stale joke bankers hear at almost any regulatory conference, the one that always ends with the lame punch line, "I'm from the government, and I'm here to help."
That's usually met with mild titters and a few groans. But if the speaker happens to be from one of the government-sponsored agencies and he's talking about affordable housing, he may just be telling the truth. Around the country, support for affordable housing from the stockholder-owned, quasi-government corporations--Fannie Mae, Freddie Mac and the Federal Home Loan Banks--is snowballing. Through partnerships with banks and thrifts, housing agencies, non-profits and local governments, they're creating bold initiatives to tackle one of the country's most intractable problems, scarcity of decent shelter.
Even as banks and thrifts have chafed over stiffer fair lending and CRA rules, they've piled into such affordable housing programs. Government grants and subsidies have pared risk, and borrower education and counseling from nonprofit agencies have made repayment an even better bet.
No question, the FHLBs and the secondary market mortgage agencies have more on their minds than just doing good. The FHLB System no longer regulates thrifts, and its basic mission today is financing affordable housing. Since the system's district banks sell stock and pay dividends, it's in their interest to spur member lending. For the two huge mortgage corporations, locked in mortal combat for control of the secondary market, successful affordable housing programs generate more loan volume and more fees.
Nationwide, the dozen Federal Home Loan Banks have generated $277 million in grants and subsidized advances in the past five years through the aptly named Affordable Housing Program. Formalized in 1989 after passage of the thrift bailout law, AHP offers below-market loans and direct subsidies to System members, including commercial banks, enabling them to pare their costs. It's been credited with creating 73,000 housing units.
The program continues to flourish, and now Fannie and Freddie are putting their shoulders to the wheel as well, with a potential many times greater. Fannie alone has pledged to help finance 10 million affordable housing units by the year 2000; Freddie, which has a bit less volume and market power, is straining to approach that.
Fannie and Freddie's affordable housing efforts also help placate Congress, which has upbraided them in recent years for the low percentage of lesser-income mortgages they buy. Indeed, Fannie and Freddie face tough goals for purchasing mortgages that finance affordable housing: 30% of each agency's total this year must be for low- and moderate-income housing, and 30% must come from inner cities (the two percentages can overlap).
To many bankers, the biggest boost Fannie or Freddie could offer is to buy more mortgages originated in poorer neighborhoods; such loans may have credit or repayment characteristics that historically have barred their sale in the secondary markets. Both GSEs have been busy addressing "nonconforming" loans and clarifying which underwriting criteria pass muster. Each is now accepting such nontraditional credit verification sources as rental and utility payment histories. Freddie Mac representatives say they've made more than 50 changes to their underwriting guidelines in the past four years in an effort to expand nontraditional purchases.
Some bankers, however, don't see this new drive as bringing dramatic change. Fannie and Freddie "have come a long way, but maybe they haven't gone far enough. Cleveland banks have gone a very long way to help the community," says Ronald Hongosh, senior vice president for retail credit administration at National City Bank of Cleveland. The bank has priced loans aggressively for years in lower-income areas, and only lately have the GSEs' underwriting standards approached its own, he says.
Bankers can take heart that the borrower education theme echoes through many of the agencies' programs--recognition that risk can be lessened if borrowers are thoroughly schooled on the importance of budgeting, personal credit and paying debts. The GSEs are subsidizing those efforts. "We've made a very substantial investment of working capital, above and beyond our commitment to buy mortgages," says Daniel Russell, vice president for affordable housing at Freddie Mac.
Here's a look at some of the programs offered for borrowers--and lenders--by the secondary market agencies:
Among Freddie's most ambitious programs is a 20-city pilot affordable housing program announced in April. Combining forces with the Neighborhood Reinvestment Corp. and the Mortgage Guaranty insurance Corp., Freddie is targeting first-time homebuyers and committing $20 million to buy mortgages with 95% loan-to-value (LTV) ratios that MGIC will insure.
Neighborhood Reinvestment's "Neighborworks" affiliates will provide pre- and post-purchase counseling, landlord training and property inspections. Borrowers seeking loans under $80,000 can put down as little as $1,000; for larger loans, the cash clown payment is just 2%, and gifts, grants or unsecured loans can provide the remaining 3%.
With other nonprofit partners, the National Training and Information Center/National People's Action and the Neighborhood Housing Services of Chicago, Freddie is providing special financing on 2-to-4-unit properties in Chicago. Freddie has committed to buying tip to $25 million in first mortgages, and six bank and thrift seller/servicers have contributed to a pool to be used for secondary financing and renovation of the properties. The same program has recently been expanded to Boston.
"We're pretty confident that affordable lending doesn't have to be construed as high-risk lending," says Mike Coffey, vice president for marketing and sales administration at Freddie Mac. "The performance of that book of business is just as good as that of the non-affordable lending."
Freddie has established initiatives with a number of state and city housing authorities in places like Connecticut, Missouri, North Carolina, New York and Delaware. Many of these involve pledges to buy a specified amount of mortgages; others involve risk-sharing. In Kansas, for instance, Freddie has agreed to share potential losses with the state government and 75 lenders and is providing an affordable, 30-year fixed-rate mortgage with an LTV up to 90%. Kansas, in turn, is providing a 15-year, no-interest second lien.
In another pilot, Freddie is working with the Los Angeles Housing Department to utilize federally subsidized HOME funds from HUD. When lower-income homeowners take out loans from three local lenders--First Intestate Bank of California, Family Savings Bank and Countrywide Funding Corp.--the City of Los Angeles will utilize HUD block grants to provide second mortgages that supplement the down payment and cover rehabilitation costs.
The second mortgage reduces the borrower's risk from a high LTV, Russell notes, adding that if there were a default on the first mortgage, the second might be forgiven.
Since Fannie Mae launched its affordable housing outreach programs in 1987, it has built a network of 1,300 affordable housing "partners"--lenders, state and local housing agencies, community groups and others.
Fannie's much-ballyhooed $1 trillion, seven-year plan to help provide 10 million homes "for families and communities in need," announced earlier this year by Chairman James A. Johnson, is taking it in some interesting directions. Fannie is setting up 25 offices around the U.S. that "will form long-term partnerships with cities, rural areas and other underserved communities."
The company has opened such "partnership offices" in Baltimore, Washington, Cleveland, Chicago and San Antonio, and plans to establish five more this year. Loan targets are ambitious: In Baltimore alone, Fannie hopes to work with local lenders to finance more than 10,000 housing units (including "middle-income") with a targeted value of $750 million by 1999.
In its HomePath program, Fannie offers renters step-by-step guidance to buying a home. Callers to a toll-free nationwide number are linked to local groups that can answer questions. "If somebody isn't ready to buy a home, instead of hearing, 'No, you can't afford to buy a home,' they'll be told, 'Not yet, but here's what you need to do to become a homeowner,'" says John R. Hayes, senior vice president and head of Fannie Mae's Midwestern regional office.
Like Freddie's Affordable Gold, Fannie has a program, FannieNeighbors, that allows single-family borrowers to put down just 3% and use gifts or grants for the remaining 2% of the down payment. Fannie's Community Home Buyer's Program provides added flexibility on underwriting, along with buyer education.
Fannie is also a lender. It recently provided an $855,000, 25-year multifamily mortgage for development of low-income town home apartments in Lincoln, NE, a project that also involved city officials, non-profits and the National Bank of Commerce, which provided a construction loan.
And while the focus may be on urban blight, Fannie hasn't ignored rural bankers. Earlier this year it brought out a booklet, "Underwriting Rural Properties," which one Fannie Mae official said "de-mystifies our rural lending program."
Referring to Fannie's trillion-dollar pledge, Johnson conceded that "much of what we intend to do will be a stretch. But with our commitment came a very specific pledge to expand and deepen our outreach and partnerships in cities around the country."