HUD Bias Claims Bend Reality

You couldn’t miss the headline. It was the lead story on the front page of The Washington Post, prime journalistic real estate generally reserved for matters of the greatest national importance.

On March 2nd, the Post headline told us that HUD Mortgage Policies Hurt Blacks.

“Tens of thousands of black Americans,” said the story, “pay higher mortgage rates or may not be able to get a mortgage at all because of lending policies at Fannie Mae and Freddie Mac, the nation’s two biggest suppliers of cash for home loans, according to officials at the Department of Housing and Urban Development.”

The article explained that 8 million loans were issued in 1998, excluding FHA and VA financing. Within the core group of 8 million loans, blacks received 5 percent of all mortgages. In the same period, 3.2 percent of the loans purchased by Fannie Mae and 3 percent of the loans acquired by Freddie Mac went to blacks.

It is very much in the national interest to assure that every qualified person who wants to own a home has that opportunity. So is it true, have two of the most important players in real estate finance adopted policies that limit homebuying opportunities?

Fannie Mae and Freddie Mac are secondary lenders. They do not make loans directly to the public. Instead they buy loans made by local lenders. The cash local lenders receive is then used to create more loans. Freddie and Fannie get their cash from investors who buy mortgage-backed securities and bonds, and from interest which accrues from the loans each organization holds.

Fannie Mae and Freddie Mac were originally created by the federal government and then spun off to the private sector. They are “GSEs,” or “government sponsored enterprises,” entities which are different from private businesses in two important ways: First, they are exempt from state and local income taxes. Second, the government will step in to protect investors if Fannie Mae or Freddie Mac fail. Because of such federal guarantees, Fannie Mae and Freddie Mac are able to borrow money at rates far below those which commercial firms might pay.

Fannie Mae and Freddie Mac cannot buy just any mortgage or abandon reasonable lending requirements. Generally, Fannie Mae and Freddie Mac purchase fixed and adjustable conventional loans as well as VA and FHA financing.

Fannie Mae and Freddie Mac are not allowed to buy all conventional loans, however. For instance, they do not purchase “jumbo” loans, which today means those with an initial principal balance of more than $252,700 in all jurisdictions except Alaska, Hawaii, and Guam. Also, they do not buy loans with less than 20 percent down — unless such loans are protected with private mortgage insurance (PMI).

Why don’t Fannie Mae and Freddie Mac buy all loans? If Fannie and Freddie buy risky loans and default, taxpayers — you and me — may have to bail them out at enormous expense.

Given this background, it’s clear that Fannie Mae and Freddie Mac should not buy loans which generally entail more risk. And therein lies a problem.

Fannie Mae and Freddie Mac are not big players in the “subprime” market, the financial arena for loans made to those with weak credit. It turns out that if we do not include subprime mortgages in loan totals for the two companies, the Post reported the next day, then “Fannie Mae is buying loans made to minorities at about the same level at which lenders are making those loans. Loans to blacks equaled about 4.1 percent of those general market loans in 1998 and the amount of such loans Fannie Mae bought was 4 percent of all the loans the company bought that year.” (See Fannie Mae Chief Defends Record, March 3, 2000).

HUD has now come out and said the mortgage-loan quota for low- and moderate-income families that Fannie Mae and Freddie Mac must buy should rise from 42 percent of their overall mortgage purchases from these income categories to 48 percent this year, and 50 percent in 2001.

And how will Fannie Mae and Freddie Mac reach such quotas? One approach is to actively seek subprime loans, a strategy likely to chill investors. Their first reaction will be “more risk.” The second will be “higher rates.”

Are higher rates good for low- and moderate-income buyers? Of course not, they merely make homebuying less plausible for those with limited budgets.

An alternative idea is to move subprime borrowers into lower-cost loan products.

Speaking in Washington, FannieMae Chairman and CEO Franklin D. Raines said that “about half of the borrowers now paying for high-rate subprime loans could qualify for lower-cost conventional financing. To make this possible, we recently began offering borrowers with slightly impaired credit our Timely Payment Rewards mortgage. It begins at 2 percent below the subprime rate, and if the borrower makes payments on time for 24 months, the rate automatically drops one more percent.

“Over the life of the loan,” said Raines, “we save these borrowers up to $200,000. And we are going to make sure more loans sent to us are approved by us.”

And what about HUD? If HUD is really committed to helping low- and moderate-income buyers, instead of making inflamatory claims why doesn’t it adopt programs and policies which benefit such potential purchasers? For instance:

Why must FHA buyers pay insurance premiums for the life of their loans — even if an owner has made full and timely payments for 29 years and owes $200 on a home worth $150,000? Higher premiums are higher costs, and higher costs simply limit the pool of potential owners. In comparison, conventional lenders must cancel PMI coverage once loan percentages fall to a certain level under the Homeowners Protection Act — and most investors have even more liberal cancellation policies than the Act requires.

Why does HUD penalize low- and middle-income borrowers by insisting that they should not be able to purchase with seller assistance? Conventional lenders are elated when owners provide “seller contributions” of 3 to 9 percent, depending on the program and the amount down, but HUD says seller contributions should not be allowed, a prohibition which hurts such programs as California’s Nehemiah effort, a program which has created some 7,000 owner-occupant households.

Why has HUD increased the cost of FHA financing by attempting to make appraisers into home inspectors and greatly increasing appraiser liability? The result has been increases in appraisal costs not seen with conventional and VA financing, and — again — higher costs for low- and moderate-income buyers.

Raines also wrote a letter to the Washington Post in which he said “the Post cited HUD data that is too unreliable to support the assertion that Fannie Mae fails to lead the market in lending to African Americans, let alone that it ‘hurts’ them. For instance, in 1998 the borrowers of 426,000 loans we purchased identified themselves as members of minority groups. But another 250,000 borrowers chose not to reveal their race. So the actual number of African Americans we served could have been significantly different from the number The Post cites with such assurance.

“Worse than the shaky statistics is the lack of any proof of causation. Fannie Mae does not originate loans, lenders do. And lenders may choose not to sell us the loans, preferring instead to keep them in their own portfolios or sell them to Wall Street. Moreover, some loans do not carry mortgage insurance, which we must require as a matter of federal law.”

A new bill just introduced in Congress, H.R. 3703, would end HUD’s right to oversee Fanne Mae and Freddie Mac. Ending HUD oversight is a good idea but it doesn’t go far enough: Given that Fannie Mae and Freddie Mac are both well-run and profitable, it would make more sense to privatize HUD under their supervision.
Published originally by Realty Times on March 6, 2000 and posted with permission.

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