The head of Fannie Mae took aim last week at predatory lending practices targeting low-income and minority families in the subprime market.
Franklin D. Raines, chairman and CEO of the secondary-market giant, spoke at Columbia University's School of International and Public Affairs. He inaugurated a lecture series named for the Rev. M. Moran Weston 2d-a community banker and affordable-housing advocate. Predatory lending is one of the "countertrends" to progress made in the 1990s that has pushed the homeownership rate above 66%, he said.
"The target of predatory lending is not people trying to buy homes but people who already have homes and who have built up equity wealth in them," Mr. Raines said.
He praised the role subprime lending plays in consumer finance, however. In some cases it is "the only way some people can get the credit they need," he said, adding that in Seattle his father was a frequent customer of this type of lender.
And though subprime mortgage lending has grown dramatically in this decade with the "democratization of credit," Mr. Raines said, "it is much better to help families move from the B, C, and D credit ratings into an A rating and have them borrow from the conventional mortgage market."
Lower rates in the conventional market mean more of a borrower's payments go toward equity in the home, he said.
Fannie Mae has a number of strategies to help families move into the conventional market, he said, including outreach to make consumers aware of the importance of having good credit or correcting credit problems.
Some analysts have pointed with concern at Fannie's forays into the manufactured housing market and the experiments of its secondary-market rival-Freddie Mac-in the home equity sector.
Home equity customers tend to be "typical middle-class folks with some ding on their credit," said Wright H. Andrews Jr., a partner in the Washington law firm of Butera & Andrews. Only about 10% are senior citizens, he said. Mr. Andrews also is Washington counsel for the National Home Equity Mortgage Association, a trade group.
Loan flipping-repeated refinancings resulting in high fees and little or no financial benefit to the borrower-is the No. 1 abusive practice, Mr. Andrews said. Foreclosure abuses, in which loans are flipped several times in a scheme by the lender eventually to seize the collateral property, are also a problem, he added.
"It isn't just subprime where people are getting hit," Mr. Andrews said. Predatory practices exist in the conventional market in the form of "junk fees," he said, such as inflated credit report costs and other items.
The home equity industry is preparing to go to Capitol Hill with proposals to address such predatory practices, he said.
"We don't think that the few bad actors out there should be allowed to rip off consumers and give the industry a bad name," he added.
But most areas where such abuses occur are in "the lower end of the market," he said. "Where Fannie and Freddie are looking hardest is the upper end of the market. They'd like to cream-skim."
"The mortgage finance industry," Mr. Raines said, "has a responsibility to police the bad actors, protect consumers, and establish standards for what constitutes appropriate lending."
People should be offered the lowest rate for which they qualify; there should be no loans that "are designed to fail"; and lenders should give "complete and accurate disclosure" in the form of "one, single, honest-to- God number that captures the entire cost of the loans," he said.
The Fannie Mae Foundation plans to continue its efforts to increase people's "financial literacy," Mr. Raines said. It will soon release a guide in English and Spanish that focuses on predatory lending practices.