A Dec. 7 article in American Banker described a Federal Reserve Board study about risk assumption in the mortgage market that was originally published in the November issue of the Federal Reserve Bulletin. In the following article, Ann Logan, a Fannie Mae executive vice president, responds to the Fed study.
The recent Federal Reserve Board study, "Credit Risk and the Provision of Mortgages to Lower-Income and Minority Homebuyers," is misleading and inaccurate.
Fannie Mae is the largest single investor in home loans, and we assume all or a large part of the risk on the vast majority of all mortgages we finance. Fannie Mae holds in its portfolio or guarantees more than $700 billion of mortgages for more than nine million homeowners. Of that amount, we bear some or all of the risk of default for 92% of the business.
In most of the figures the authors' cite - and those picked up in the article - they characterize the private mortgage insurers as the risk takers to the exclusion of Fannie Mae. The study states: "Because PMI companies are bearing the preponderance of risk associated with such mortgages, assigning them all the risk is a simplification that should not be seriously distorting." (Emphasis added.)
It is distorting, and the authors' own statements undercut their assertion. In fact, as the authors themselves note, private mortgage insurance typically covers only 20% to 30% of the mortgage investment at risk.
A substantial part of the total risk is carried by the investor. In 1994 Fannie Mae experienced about $84 million in losses on loans that carried mortgage insurance. The average loss to Fannie Mae for each privately insured loan that failed last year was more than $15,000. Furthermore, Fannie Mae reported a total of $373 million in losses in 1994.
Thus, where the analysis excludes loans with mortgage insurance from those on which Fannie Mae and Freddie Mac assume risk, it seriously understates the financial obligation we are taking on. The authors then further understate the Fannie/Freddie risk share by including FHA/VA loans that flow to Ginnie Mae and loans outside our loan limit.
Adjusting for these factors yields very different results than those highlighted in the study. For example, while the study states that Fannie Mae and Freddie Mac together bore 17% of the risk on all loans originated in 1994, data from the study itself show that together these two institutions bore some or all of the risk on 37% of the limited sample of conventional loans within the conforming loan limit on which this study is based.
In addition, this study analyzes only a subset of all loans made in the first 10 months of 1994. The paper relies mainly on HMDA data - which do not include all mortgage originations and are limited to metropolitan areas. These data are supplemented by PMI data, which only partially track the HMDA information. There is no way to know how this may bias the results.
Similarly, the study considers only purchase money mortgages - ignoring the large number of refinancings that occurred in 1994. Also, 1994 is not a representative year, because the large number of adjustable-rate mortgages that were originated in that year are much less often offered for sale in the secondary market.
The study does not provide anything like a full picture of Fannie Mae's service to lower-income and minority families. Through the first nine months of 1995, 40% of the single-family loans that Fannie Mae financed served families with incomes less than or equal to the area median, and more than 19% served families in which one or more of the borrowers is a minority.
These figures have risen sharply over the past three years - from 32% of our loans serving low- and moderate-income households, and 13% serving minorities in 1993. These gains have been in part a result of our outreach efforts and targeted lending products. The statement in the study to the effect that "... Fannie Mae and Freddie Mac ... seem to have greater difficulty bearing the credit risk associated with the mortgages extended to lower-income and black or Hispanic borrowers" is simply not true, at least in the case of Fannie Mae.
The study includes virtually no acknowledgement of the special products and services that Fannie Mae offers to increase housing opportunities for underserved families under our seven-year $1 trillion "Showing America a New Way Home" targeted lending commitment. As part of that initiative, in 1995 alone, Fannie Mae:
*Provided homebuyer information to more than one million families through a nationwide consumer outreach and education campaign.
*Developed a variety of new affordable housing products, including a conventional reverse mortgage loan and expanded rehabilitation products.
*Opened our first 20 Partnership Offices to increase our investments in central cities and other underserved communities.
*Increased our business ties with lenders owned by women and minorities by establishing relationships with 212 such institutions.
*Invested more than $7 million in 13 community development financial institutions.
Through these activities we are doing more than any other single financial institution to extend mortgage credit to underserved communities.
The statement from the study that " ... Fannie Mae and Freddie Mac ... lack the opportunity to look beyond traditional measures of risk" is dead wrong. The authors don't seem to know how we do our business. All of Fannie Mae's loan products include underwriting flexibilities and encourage lenders to consider nontraditional sources of credit in qualifying families for home mortgages. Also, we go to great lengths to communicate with lenders and private mortgage insurers about these flexibilities. In the first 10 months of 1995 alone, we have held more than 370 seminars around the country to train our customers' underwriters on the use of our products.
The authors also ignore that the Department of Housing and Urban Development has established explicit affordable housing goals for the company. We exceeded all of them in 1994 - the year of the study. We are exceeding them this year as well. Through the third quarter, in both single-family and multifamily, Fannie Mae has achieved more than a 47% rate on our low- and moderate-income housing goal of 30%. Additionally, we have surpassed our special affordable housing goal of $4.6 billion by $1.2 billion for a year-to-date total of $5.8 billion. The study makes no acknowledgment of that fact.
The study is wrong, incomplete, and the authors' statements reveal they don't understand how our business operates. This isn't surprising. They never bothered to discuss their research with us before releasing it.