September 30, 1999

Fannie Mae Eases Credit

To Aid Mortgage Lending

By STEVEN A. HOLMES

In a move that could help increase home ownership, the Fannie

Mae Corporation is easing the credit requirements on

 loans that it will purchase from banks and other lenders.
The action, which will begin as a pilot program involving

24 banks in 15 markets – including the New York

 metropolitan region — will encourage those banks to

extend home mortgages to individuals whose credit is

generally not good enough to qualify for conventional

 loans. Fannie Mae officials say they hope to make it a

 nationwide program by next spring.
Fannie Mae, the nation’s biggest underwriter of home

mortgages, has been under increasing pressure from the

 Clinton Administration to expand mortgage  loans among 

low and moderate income people and felt pressure from

stock holders to maintain its phenomenal growth in profits.
In addition, banks, thrift institutions and mortgage

companies have been pressing Fannie Mae to help them

make more loans to so-called subprime borrowers. These

 borrowers whose incomes, credit ratings and savings are

 not good enough to qualify for conventional loans, can

only get loans from finance companies that charge much

higher interest rates — anywhere from three to four

percentage points higher than conventional loans.
‘Fannie Mae has expanded home ownership for millions

of families in the 1990′s by reducing down payment

requirements,’ said Franklin D. Raines, Fannie Mae’s

chairman and chief ex ecutive officer. ‘Yet there remain

too many borrowers whose credit is just a notch below

what our underwriting has required who have been relegate

 to paying significantly higher mortgage rates in the so-called

subprime market.’ Demographic information on these borrowers

is sketchy.

But at least one study indicates that 18 percent of the loans

 in the subprime market went to black borrowers, compared

to 5 per cent of loans in the conventional loan market. In

moving, even tentatively, into this new area of lending,

Fannie Mae is taking on significantly more risk, which may

 not pose any difficulties during flush economic times.

 But the government-subsidized corporation may run into

 trouble in an economic downturn, prompting a

government rescue similar to that of the savings and loan

 industry in the 1980′s. 

“From the perspective of many people,

including me, this is another thrift industry growing up around us,’

said Peter Wallison a resident fellow at the American Enterprise Institute.

‘If they fail, the government will have to step up and bail them out

 the way  it stepped up and bailed out the thrift industry.’
Under Fannie Mae’s pilot program, consumers who qualify can secure a

mortgage with an interest rate one percentage point above that of a

conventional, 30-year fixed rate mortgage of less than $240,000 — a

rate that currently averages about 7.76 per cent. If the borrower

makes his or her monthly payments on time for two years, the one

percentage point premium is dropped.
Fannie Mae, the nation’s biggest underwriter of home mortgages,

does not lend money directly to consumers. Instead, it purchases

loans that banks make on what is called the secondary market. By

expanding the type of loans that it will buy, Fannie Mae is hoping to

spur banks to make more loans to people with less-than-stellar credit

 ratings.