The proposed affordable-housing goals for Fannie Mae and Freddie Mac are not nearly as tough as they may have seemed when they were announced with great fanfare a few weeks ago.

The Department of Housing and Urban Development proposal would require the government-sponsored enterprises to raise the portion of their portfolios devoted to low- and moderate-income loans by 6 percentage points, to 48%. But a close review of the guidelines reveals that HUD is also proposing a liberalization in the way loans for apartments would be counted. Had the same rules been in effect, the two companies would have been close to meeting many of the requirements two years ago.

Critics of Fannie and Freddie said the favorable crafting of the proposal - in a congressionally mandated consultation between HUD and the two enterprises - illustrates the undue clout the two mortgage buyers have been able to wield when regulators set their social goals.

"What you're seeing is Fannie and Freddie flexing their muscle. They have extraordinary political clout. They have more money than God and they use it," said Bruce Marks, chief executive officer of the Neighborhood Assistance Corporation of America, an affordable-housing advocate.

After the goals came out March 1, the start of a 60-day public comment period, both enterprises reiterated their commitment to affordable housing and said they would strive to reach them. Fannie Mae chairman Franklin D. Raines said later that the new goals were so tough they would push Fannie Mae into the subprime sector - something Fannie had said it would not do - heightening worry among specialty lenders about competition on their turf.

When questioned about how hard the goals would be to reach under the new counting rules, Freddie Mac spokeswoman Sharon McHale reiterated that the new thresholds are "stretch goals." In an economic downturn, she said, the goals would become "incredibly difficult or even impossible" to achieve.

Fannie Mae spokesman David Jeffers said, "No bank, thrift, or deposit institution subjected to [the Community Reinvestment Act] is expected to set aside half of its business for consumers. Our HUD requirements are like CRA on steroids."

HUD's proposed goals raise the target percentage for low- to moderate-income loans in the GSEs' portfolios to 48%, from 42%; the target for loans in the very low-income category to 18%, from 14%; and the target for loans to underserved areas to 29%, from 24%. Assistant Secretary of HUD William Apgar said, "Some people are saying we are being too harsh; others are saying that we're doing just fine. So we think we have it just about right."

And he added that the details of the proposal are still open for public comment.

Most observers agree that the proposal would have a real impact on Fannie and Freddie's business starting next year, when each goal rises another 2 percentage points. But it is far from clear that the change would have much of an impact this year.

Because Fannie and Freddie data doesn't become available until a year after the fact, no one outside the regulatory circle knows how close the two GSEs are to their targets at any given time. But it appears the two are well on their way to meeting the new thresholds. For one thing, Fannie and Freddie were already way ahead of their 1996-99 goals by 1998, the latest year for which their figures are available.

In the low- and moderate-income category, Fannie was at 44.1% and Freddie at 42.9%. In the underserved-areas category, Fannie was at 27% and Freddie was at 26.1%. As for the very low-income goal, Fannie and Freddie were at 14.3% and 15.3%, respectively.

Working in their favor this year has been a drop in mortgage refinancing volume. Refinancings typically involve more well-to-do people, so it will be easier to achieve the ratios as loans for refinancing disappear from the equation.

The new rules for counting loans would provide yet another boost. They will enable Fannie and Freddie to double count loans for small multifamily properties (with five to 50 units) toward all three goals. Fannie and Freddie can also double count loans for small rental properties (with two to four units) when their purchases in this area pass 60% of their average for the last five years.

In announcing the proposed goals, HUD said it was significantly ratcheting up the goals. Internally, the agency has calculated that these changes, had they been in effect in 1998, would have brought Fannie to 2.1% shy of the new low- and moderate-income goal, to 2.72% from their very-low-income goal; and to 0.58% from the new underserved-areas goal.

Because HUD was mandated by Congress last year to consider Fannie and Freddie separately when formulating the goals, it built an extra incentive for Freddie to catch up to Fannie in the multifamily area, using an "adjustment factor."

Freddie's presence in multifamily was negligible in the early '90s, and it has only recently started to do better. To push Freddie to make further improvements, HUD would let Freddie count loans for small multifamily properties as 1.2 loans towards the low-moderate and very low-income categories.

The adjustment factor, which will end in 2003, would bring Freddie to 2.36% from meeting the new low-to-moderate goal, 0.56% from the very low-income goal, and 1.02% shy of the underserved-areas goal, assuming they buy loans at 1998 levels.

HUD is proposing a variety of other incentives, including counting rule changes that would make it easier for Fannie and Freddie to count other loans including rental loans toward the goals, but has not provided estimates of the impact of these changes on counting.

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