Why Low-Income Lending Won't Take A Hit

Will low-income families become innocent victims of the crackdown on Fannie Mae (FNM)? After all, one of Fannie's official missions is to increase the rate of homeownership by expanding the pool of capital available for mortgage loans. If Fannie shrinks that pool, low-income people could find it harder to get mortgages and buy homes.

But most experts say the risk of that is small. They think Fannie may not have to shrink its business at all. And even if it does, others will likely step in to fill the breach. Fannie's fixes to its accounting problems -- especially strengthening its capital position -- "will have no impact on minority and low-income homeownership," argues Karen Shaw Petrou of Federal Financial Analytics Inc., a firm that keeps track of Fannie and Freddie Mac (FRE) for banks and other clients.

To resolve its accounting disputes and bolster its financial health, Fannie has agreed to boost the ratio of its capital to its portfolio of mortgages and mortgage-backed securities. One way to do that would be for it to buy and hold fewer mortgages, which might make lenders less willing to lend and nudge interest rates up slightly. But Fannie may not need to do that. Instead, it could sell preferred stock or retain more of its earnings, improving the capital-to-assets ratio without reducing the size of its portfolio. Even those who think there might be an impact on low-income buyers say there's no reason to believe it would be large. Says Alan S. Blinder, a Princeton University economist: "Some curtailment [of mortgage purchases] is certainly a reasonable expectation, but there's no way to know about the magnitudes."

Even if its agreement with the Office of Federal Housing Enterprise Oversight, its regulator, puts a squeeze on Fannie, minority lending would be the last place it would cut back. For one thing, Fannie's special status, in which its debt is implicitly guaranteed by the U.S. Treasury, was granted in part because Fannie is expected to encourage low-income lending. Under pressure from critics who say it hasn't been doing enough, Chief Executive Officer Franklin D. Raines recently vowed to help create 6 million more new homeowners, including 1.8 million new minority homeowners, and to drive up minority homeownership from half to 55% by 2014. So there should be plenty more happy new home buyers like Cassandra Coleman. She was able to buy a house in Milwaukee last year in part because the bank that originated her mortgage partnered with Fannie Mae to help first-time home buyers.

If, against all odds, Fannie did pull back on its support for minority home buyers, the private markets probably would fill in the gap. Under legal prodding, banks and other lenders have increased their lending to low-income buyers -- and have found that the business they once avoided is lucrative. "I think there's an awareness that this can be a good business," says Marc H. Morial, chief executive officer of the National Urban League.

And there are other institutions that can buy up mortgages in the secondary market. Freddie Mac, Fannie's sibling in mortgage financing, would be eager to increase its role in that arena. So would the 12 regional Federal Home Loan Banks, which hold mortgages jointly with banks in their system, assuming interest-rate risk. "This gives the home-loan banks an opportunity," says Alex J. Pollock, former head of the Federal Home Loan Bank of Chicago. Add it all up, and there's little reason to think that Fannie Mae's woes will spill over to low-income home buyers.

By Joseph Weber in Chicago

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