Fannie, Freddie Feeling the Heat On Lending Bias

Fannie Mae and Freddie Mac, the quasigovernmental mortgage titans, are feeling the intense pressure that is being exerted on banks to expand business with the poor.

Federal policymakers, housing activists, and others are moving threateningly to ensure that the agencies buy more loans made to people of lower incomes.

"The agencies aren't adequately serving low- and moderate-income homebuyers," said Alfred DelliBovi, the second-ranking official at the Department of Housing and Urban Development. Senate staff members, meanwhile, have drafted legislation that would establish clear targets for the agencies' low-income activities.

Fannie Mae's top lobbyist, in a letter of protest, warned that such targets could force the agencies to retreat from "the broad middle class" of homebuyers.

Impact Could Be Broad

The debate is still in its early stages, but it has major implications for the nation's housing market and for thousands of banks, thrifts, and mortgage companies that do business with the agencies, or compete against them.

Chartered by Congress but owned by private stockholders, the Federal National Mortgage Association and the Federal Home Loan Mortgage Corp. buy about one-third of all home loans that lenders make. They hold some of the mortgages and repackage the rest for sale to investors.

Fannie and Freddie have managed to earn spectacular profits, returning more than 25% on shareholder equity. In a clear boon to homebuyers, they also reduce the interest rates on the loans they purchase by an estimated 25 to 50 basis points because of their unusually low funding costs.

The Crucial Issue

The debate revolves around a simple question: Are Fannie and Freddie helping the right home-buyers? Two recent developments highlight the key issues being debated:

* A major study of the mortgage market by the Federal Reserve Board showed that only 19% of the loans bought by each agency last year were made to borrowers with household comes below the national median. Federal regulators had previously believed the share exceeded 30%.

Private lenders, meanwhile, managed to extend 21% of their conventional mortgages to lower-income households, the Fed study found.

* Federal officials announced this week that the agencies next year will be able to raise the maximum size of the mortgages they buy to $202,300, cracking the $200,000 barrier for the first time.

Far Above National Medium

To qualify for a loan that big, a borrower would need annual income of about $80,500, or more than 2.5 times the national median for household income, according to the U.S. League of Savings Institutions.

"Fannie and Freddie are increasingly serving upper-middle-income housing needs," said Rep. Jim Leach, R-Iowa.

"While they have a low- and moderate-income component, it is substantially less than those" of banks and thrifts.

The agencies, to give them their due, have both unveiled a host of new services over the past year to help lenders serve lower-income people. These include plans that encourage employers to help with workers' mortgage down payments and special loan packages for members of labor unions.

The agencies, though resisting mandated targets, also acknowledge a need to further bolster their support of the low- and moderate-income market.

Effort Held Insufficient

"Are we doing a lot? Yes," said Fannie Mae spokesman David Jeffers. "Are we doing enough? No."

Some lenders, for their part, are blaming Fannie's and Freddie's credit standards for some of the controversy raining upon them after release of a Federal Reserve study showing disproportionate rejection rates for minority mortgage applicants relative to rejections for white applicants.

If Fannie and Freddie won't buy the loans, the thrifts and banks argue, lenders can't make them. But the agencies say their standards are far more flexible than bankers would suggest.

"We will not willingly be an excuse for a lack of effort by lenders," said Mr. Jeffers.

Figures Seen as Puzzling

The Federal Reserve study, based on data compiled under the Home Mortgage Disclosure Act, suggests that minority borrowers accounted for 13.5% of the loans sold to Fannie Mae last year and 19.9% of those sold to Freddie Mac. About 15% of all conventional home loans originated by lenders were made to minorities.

Mr. Jeffers said Fannie does not know why its ratio was lower than that of lenders or Freddie Mac.

"Certainly it's something on the top of the list" to investigate, he said.

Likewise, Frank Nothaft, a Freddie Mac economist, said he could not explain why Freddie's minority-loan ratio was the highest of the three.

"It's the first time we've seen this type of data," Mr. Nothaft said.

The public previously had only a sketchy grasp of what type of borrowers were behind the loans sold to the agency. The agencies have not tracked borrower income data in their computer systems, and government analysts have based their estimates of the borrowers' incomes only on the prices of homes underlying the mortgages.

Income Estimates Called High

Those estimates, government analysts say, have proved to be way too high.

The new mortgage disclosure data and other studies, however, have produced a sea of new statistics. And HUD, members of Congress, and others have wasted little time in mining the information.

As part of their effort to draft broad legislation to regulate "government-sponsored enterprises," staff members of the Senate Banking Committee recently floated a plan requiring 30% of the agencies' mortgage purchases to be from low- and moderate-income borrowers.

After two years, the requirements would be adjusted to reflect market conditions and the agencies' past performances.

Some Congressional sources say that Fannie, in particular, would have little difficulty reaching the 30% minimum.

Revised Analysis

Banking committee staff members, after making some adjustments to the Fed's analysis, have concluded that 22% to 24% of the home loans each agency purchases are for low and moderate-income people - up from the 19% suggested by the Fed. In addition, Fannie Mae could count some of its purchases of apartment-building loans, an activity Freddie Mac has avoided in the past year.

Nonetheless, the agencies are worried by the effort. William Maloni, Fannie Mae's senior vice president of policy and public affairs, fired off a letter to the banking committee staff assailing the measure as "micro-managed credit allocation."

The targets, he wrote, "might well cause the agencies to reduce the level or increase the price of their services to all other homebuyers - the broad middle class whom we currently effectively serve." That amounts to political tinder.

Alternatively, he said, the measure could undermine the safety and soundness of the agencies.

No Legislation This Year

Washington insiders say that Congress is unlikely to adopt any legislation on Fannie Mae and Freddie Mac this year, because of the press of other issues. But the regulation of the agencies is sure to be taken up again in 1992.

Some lenders, particularly thrifts, say they would welcome a push by Fannie and Freddie into low-income loans. For one thing, it would give them a broader outlet for loans they write to satisfy the requirements of the Community Reinvestment Act.

Mortgage Bankers Wary

But mortgage banking companies, which sell all their originations, say they would be distressed if the pressure forced any reduction in the agencies' purchase of loans to upper-middle-income households.

Says the head of one bank-owned mortgage company: "I get nervous whenever you tinker with Fannie and Freddie."

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