To the Editor:

Your report (Dec. 6) on our study of 1994 mortgage lending to lower- income homebuyers and the distributions of the associated credit risk of those loans provided an accurate account of that work. Fannie Mae's subsequent comment (Dec. 12) argues that the conclusions are misleading and inaccurate. We strongly disagree.

As Fannie Mae notes in its commentary, applying their proposed adjustments to the data raises the share of the credit risk of all conforming mortgages borne by Fannie Mae and Freddie Mac from 17% to 37%. However, the same adjustments raise the share of credit risk borne by depository institutions from 28% to 45%. Thus, even if we accept the adjustments proposed by Fannie Mae, our conclusion stands: Depository institutions bear more of the credit risk of mortgage lending than do Fannie Mae and Freddie Mac.

Moreover, Fannie Mae's commentary fails to address a central result of our analysis: The proportion of the credit risk accounted for by lower- income borrowers is higher in the mortgage portfolios of depository institutions than it is in those of Fannie Mae and Freddie Mac. Adjusting for private mortgage insurance and restricting our attention to FHA- eligible mortgages (it is difficult to believe that lower-income borrowers with limited assets take out larger mortgages), 41% of the mortgages originated and held by depository institutions were extended to lower- income borrowers, compared with the 36% of such mortgages among the purchases of Fannie Mae and Freddie Mac. This relationship holds even if we adjust the treatment of privately insured loans, along the lines suggested in Fannie Mae's commentary.

We noted in our article that both Fannie Mae and Freddie Mac have made efforts to reach out to a wider range of homebuyers, and that they are given lower-income and affordable housing goals by HUD. In part, these actions explain why we had expected that Fannie Mae and Freddie Mac would promote homeownership among lower-income homebuyers to a greater extent than purely private-sector entities such as depository institutions.

Our study indicates that, despite the efforts of these government- sponsored enterprises, depository institutions and the FHA are the primary bearers of credit risk for mortgage loans extended to lower-income homebuyers.

Future research may or may not substantiate our results, but we believe that our study accurately portrays the home-purchase mortgage market in 1994.

Glenn Canner

Research adviser

Wayne Passmore

Senior economist

Federal Reserve Board

Washington

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