Fannie Mae Lowers Credit Requirements
September 30, 1999
Fannie Mae, the nation's biggest underwriter of home mortgages, plans to ease credit requirements on loans it purchases from banks and other lenders. The goal is to encourage banks to make home loans to people whose credit isn't good enough to get conventional loans and is expected to increase minority home ownership.
However, the plan significantly increases the risk Fannie Mae might run into trouble in an economic downturn. "If they fail," says Peter Wallison of the American Enterprise Institute, "the government will have to step up and bail them out" the way it bailed out the savings and loan industry.
Fannie Mae has been under pressure from the White House and banks, thrifts and mortgage companies to help them make loans to so-called subprime borrowers. While Fannie Mae does not lend money directly to consumers, it buys loans banks make in what's called the secondary market. By expanding what loans it will buy Fannie Mae hopes to convince banks to make more loans to those with lower credit ratings.
Subprime borrowers must pay three or four percentage points higher than conventional loans because of their shaky credit history and savings. And at least one study reports 18 percent of subprime loans went to black borrowers, compared to five percent of conventional loans.
However, minority home ownership has exploded, according to Harvard University's Joint Center for Housing Studies.
- From 1993 to 1998, the number of mortgages extended to Hispanics jumped by 87.2 percent.
- During the same period, the number of blacks who got mortgages increased by 71.90 percent and for Asian- Americans, it increased by 46.3 percent.
- Last year, 44 percent of the loans Fannie Mae purchased were from these groups.
Source: Steven A. Holmes, "Fannie Mae Eases Credit To Aid Mortgage Lending," New York Times, September 30, 1999.
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