The remainder of this paper examines the aspects of Freddie Mac's and Fannie Mae's procedures and policies that might inhibit the sale of "community" loans to the secondary market. For purposes of this discussion, I have organized the various into three broad categories: the wholesale nature of the secondary mortgage market; the economic disincentives that are associated with smaller loans; and the specific underwriting guidelines that have been adopted by Fannie Mae and Freddie Mac. The discussion primarily refers to investment-quality loans, that is, loans whose expected performance is relatively good. However, these same basic factors will also affect the types of riskier loans that are typically handled through special programs.

By all accounts, the typical community loan involves a greater amount of judgment on the part of the mortgage underwriter in order to assess its inherent risk. As described in more detail below, many otherwise creditworthy mortgage applications may have certain characteristics that tend to distinguish them from what are commonly known as "plain vaniha" loans-that is, loans that precisely meet the prototypical underwriting guidelines established by Freddie Mac and Fannie Mae in their Seller and Servicer Guides and adopted by a large proportion of the mortgage industry. While careful scrutiny of the borrower and the property may, in fact, reveal that the mortgage involves only the "normal" amount of risk. such scrutiny takes time and, in most instances, thorough familiarity with local markets, neighborhoods and customs.

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