New lending guidelines proposed by the Federal National Mortgage Association – also known as Fannie Mae – would permanently lock out some minority homebuyers by denying loans based on credit scores.
That's the message voiced by hundreds of affordable housing advocates around the nation, who sent an open letter opposing the move to Fannie Mae President Daniel H. Mudd last week.
"As I understand it, and why I signed onto the letter, is that while Fannie Mae and Freddie Mac have some assistance they provide to homebuyers to make homes more affordable, they're considering a new qualification so that people who have bad credit are not going to qualify for home loans," said Moloy Good, director of the Fair Housing Council of Oregon.
Observers question whether Fannie Mae and Freddie Mac may be solving their snowballing financial problems by reneging on their mission to help lower-income and minority homebuyers achieve the American Dream.
News reports this week indicate that Fannie Mae and Freddie Mac are known to hold a staggering $5 trillion in mortgage debt, secured by a combined financial cushion of only $83 billion.
Meanwhile, federal officials and lawmakers are struggling to force the two companies to fully disclose their financial dealings, with mixed results.
Roots in the Depression
Fannie Mae and Freddie Mac, the Federal Home Loan Mortgage Corporation, were started by Franklin Delano Roosevelt during the Great Depression as a funding engine to ensure that banks had enough money to make home loans to middle income Americans. The companies dominate the secondary mortgage market, meaning that they buy mortgages from banks and other institutions to "replenish" the amount of cash available for more and more mortgages.
While they are semi-privatized agencies of the Federal government, they are not government programs but rather privately-held, with investors who profit from the fees Fannie and Freddie charge to the original mortgage companies by essentially guaranteeing the loans will be repaid whether or not the homebuyers pay them off.
It's a complicated way of making a profit, and critics say Fannie and Freddie capitalize on the complexity of their business dealings to reap massive windfalls – during the sub-prime mortgage boom of the past five years, the two companies have more than doubled their market share, dealing in more than 80 percent of all mortgages resold to investors in the first three months of 2008 alone.
The spike in profits came after Congress in February allowed Fannie and Freddie to increase their loan limits above $417,000 per home as part of the economic stimulus package, effectively creating what observers call "jumbo loans."
New Controversy
The minority mortgage lending advocates' mobilization against the proposed new credit score limits comes as Fannie and Freddie face new scrutiny regarding their operations.
This week Fannie Mae is expected to release updated financial figures, while next week Freddie Mac is expected to do so.
Even as their profits have skyrocketed, a series of scandals has hit the two companies over the past five years. In 2003, Fannie Mae admitted it had understated its earnings by almost $5 billion, resulting in a $125 million fine and new financial controls imposed by deferral banking officials.
In 2006 Freddie Mac agreed to pay nearly $4 million in fines after pleading guilty to improper political contributions.
And media reports surfaced last December indicating that Fannie Mae had lost $12 billion in the sub-prime mortgage meltdown, touched off my a rise in defaults on loans to higher-risk home buyers.
This week Republicans in Congress and some financial regulators told the New York Times that Fannie and Freddie are closer than ever to defaulting on their $5 trillion debt load.
And if they default, observers say, taxpayers will very likely have to pay off the debt.
"They could cause an economy-wide meltdown if they got into real trouble and leave the public on the hook for billions," said Sen. Mel Martinez, R-Fla., the former Secretary of Housing and Urban Development.
Minority Lending at Risk
For minority and low-income homebuyers, Fannie and Freddie's financial problems may be solved at their expense sooner rather than later.
The proposed new loan guidelines would, for the first time, create credit score limits preventing anyone with bad credit from mortgage assistance programs.
A statement issued by national fair housing advocate Stella Adams says the proposal would increase the cost of obtaining home loans for people with low credit scores, disproportionately hurting the very communities who need home-buying assistance the most.
Adams says that on the VantageScore credit scoring system, which runs from 501 to 990, 84 percent of African Americans had credit scores at the lower half of the spectrum, below 745, according to a report by the Federal Reserve Board. Such scores would require home-buyers to pay 40 percent of a home's purchase price as the down payment.
Further, Adams says, the proposed pricing system would identify zip codes where higher fees would be charged for mortgage lending.
Leon Russell of the International Association of Human Rights Agencies, and Mississippi state Sen. Robert L. Jackson, who drafted the open letter to Fannie Mae President Daniel H. Mudd, call the new proposal "tantamount to both ethnic and gender discrimination."
Good, of the Fair Housing Council of Oregon, cites the Alberta Street neighborhood in Northeast Portland as a typical area heavily impacted by racism in home mortgage lending.
"Fannie Mae's mortgage assistance programs could be a way to help longtime residents keep homes in their historic neighborhood," Good said.
"Without this credit requirement it could be a way for people to choose where they want to live despite the higher prices, but using credit scores as the criteria for eligibility will lock a lot of African American families out of the program."
