|HUD No. 00-36|
|Further Information:||For Release|
|In the Washington, DC area: 202/708-0685||2 p.m. Wednesday|
|Or contact your local HUD office||February 23, 2000|
FANNIE MAE GIVES HUD INFORMATION ON 10 MILLION MORTGAGE LOANS FOR FAIR LENDING REVIEW
WASHINGTON - Fannie Mae, the nation's largest housing finance company, has given the Department of Housing and Urban Development information about the systems it has used to evaluate nearly 10 million mortgage loans, clearing the way for HUD to determine if the systems operate in compliance with laws that bar lending discrimination.
"Fannie Mae is cooperating fully to help us carry out this review, and I applaud the company for its cooperation," HUD Secretary Andrew Cuomo said. Cuomo made the statement as he announced that Fannie Mae has complied with HUD's request for information about its mortgage application evaluation systems, including its computerized system known as automated underwriting.
Three weeks ago Fannie Mae gave HUD thousands of pages of information about its underwriting systems. The company also provided HUD with computerized records of the nearly 10 million home mortgage loans it purchased from 1995 through 1999, as well as data on loans it evaluated but did not purchase. HUD has been examining the material since then.
Cuomo was joined at a news conference by Fannie Mae Chairman and Chief Executive Officer Franklin D. Raines.
"Fannie Mae looks forward to working closely in cooperation with HUD on this review," Raines said. "HUD and Fannie Mae have the same goals: ensuring fair lending, fighting discrimination and expanding homeownership opportunities in America."
HUD, which has regulatory power over Fannie Mae, will spend the next several months reviewing the company's data and documentation in order to determine whether Fannie Mae is in compliance with fair lending standards that are designed to prevent discrimination against minorities and others.
Cuomo said homeowners, the housing industry, Fannie Mae and the rest of the lending industry all benefit when HUD carries out its regulatory role effectively, because this increases the confidence of consumers that they are being treated fairly by the lending industry and opens homeownership to more families.
The Secretary said HUD's review of underwriting by Fannie Mae is needed because studies have shown that the mortgage applications of minorities are more likely to be rejected than the mortgage applications of whites with equivalent income levels, savings, and financial histories.
The Urban Institute prepared a study for HUD last September that concluded that "not all Americans enjoy equal access to the benefits of homeownership, in part because of unequal access to capital." The study also said that "minorities are less likely than whites to obtain mortgage financing and, if successful in obtaining a mortgage, tend to receive less generous loan amounts and terms."
"A mortgage is the key that unlocks the door to homeownership and a secure financial future, and too many minority families are being told they can't get that key," Cuomo said. "As a result, a homeownership gap continues to divide whites and minorities. Most white families own their homes, and build wealth as they pay off their mortgages. Most minority families are renters who see their rents go up year after year without any financial benefit."
While 73.2 percent of white families owned their homes in 1999, only 46.7 percent of African American families and 45.5 percent of Hispanic families owned their homes last year.
Fannie Mae buys mortgages issued by banks, thrift institutions and other mortgage lenders, and then sells them to investors as mortgage-backed securities. This provides the lenders with the cash needed to issue new mortgages. Fannie Mae's underwriting guidelines, including its automated system, set the standard that determines whether Fannie Mae will purchase individual home mortgage loans from lenders.
Lenders are often reluctant to originate mortgage loans to borrowers who don't meet Fannie Mae's standards, preventing families from buying or refinancing homes. As a result, many mortgage applications for conventional loans that are not accepted for purchase by Fannie Mae are rejected by lenders, or are approved by lenders only with much higher interest rates.
Congress has given HUD responsibility for regulating Fannie Mae, which is a Government Sponsored Enterprise (GSE). The company was chartered by Congress to provide public benefits by helping to expand homeownership and the supply of affordable rental housing for low- and moderate-income families, and for residents of communities underserved by mortgage credit.
As a result of its Congressional charter, Fannie Mae receives special advantages - such as an exemption from all state and local taxes except property taxes, and an exemption from Securities and Exchange Commission registration requirements.
In addition, Fannie Mae's ties to the government have helped the company get the highest possible credit rating to reduce its borrowing costs, and have boosted investor confidence in the company, thereby helping to increase earnings.
Cuomo last year asked Fannie Mae to provide detailed information about its underwriting systems. The information Fannie Mae turned over to HUD will enable HUD to determine if any of the criteria used by the company's underwriting systems contribute purposely or inadvertently to illegal lending discrimination.
Fannie Mae's automated underwriting system is called Desktop Underwriter‚. It allows mortgage bankers, brokers, and financial institutions to use computers to enter information on loan applicants, transmit the information to Fannie Mae, and receive a determination on whether Fannie Mae will accept a loan application or refer it back to the lender for manual underwriting. Desktop Underwriter uses credit scores and other automated information on loan applicants to make its decisions. Although Desktop Underwriter is only five years old, it and similar systems are rapidly becoming the prevailing means of determining if someone qualifies for a conventional mortgage.
HUD plans to draw on numerous resources to analyze the information and data it has received from Fannie Mae. Staff with expertise in regulatory oversight, economists with experience in handling large databases, fair housing and fair lending analysts, and attorneys will analyze the information from Fannie Mae. HUD may also draw on expertise from other regulatory agencies for advice and guidance on credit scoring and fair lending issues.
Last July Cuomo announced a policy to require Fannie Mae and Freddie Mac (the other GSE engaged in housing finance) to buy $2.4 trillion in mortgages in the next 10 years to provide affordable housing for about 28.1 million low- and moderate-income families. The historic action raised the required percentage of mortgage loans for low- and moderate-income families that the companies must buy from the current 42 percent of their total purchases to a new high of 50 percent - a 19 percent increase - in the year 2001. The percentage will first increase to 48 percent this year.
The mortgage purchase requirements for Fannie Mae and Freddie Mac - known as the Affordable Housing Goals - were last set by HUD in 1995, under a Congressional mandate. The goals came up for renewal last year, and HUD had the choice of leaving them unchanged, lowering them, or raising them. In addition to helping low- and moderate-income families, the initiative will also increase the affordable housing goals for loans made to underserved areas and will raise the goal for mortgages to benefit families with very low incomes.
Under the higher goals, Fannie Mae and Freddie Mac will buy an additional $488.3 billion in mortgages that will be used to provide affordable housing for 7 million more low- and moderate-income families over the next 10 years. Those new mortgages and the families who get them are over and above the $1.9 trillion in mortgages for 21.1 million families that would have been issued if the goals were not increased.