NYT 1999: Fannie Mae Eases Credit To Aid Mortgage Lending

In a move that could help increase home ownership rates among minorities and low-income consumers, the Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lenders.

The action, which will begin as a pilot program involving 24 banks in 15 markets -- including the New York metropolitan region -- will encourage those banks to extend home mortgages to individuals whose credit is generally not good enough to qualify for conventional loans. Fannie Mae officials say they hope to make it a nationwide program by next spring.

Fannie Mae, the nation's biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits.

In addition, banks, thrift institutions and mortgage companies have been pressing Fannie Mae to help them make more loans to so-called subprime borrowers. These borrowers whose incomes, credit ratings and savings are not good enough to qualify for conventional loans, can only get loans from finance companies that charge much higher interest rates -- anywhere from three to four percentage points higher than conventional loans.

''Fannie Mae has expanded home ownership for millions of families in the 1990's by reducing down payment requirements,'' said Franklin D. Raines, Fannie Mae's chairman and chief executive officer. ''Yet there remain too many borrowers whose credit is just a notch below what our underwriting has required who have been relegated to paying significantly higher mortgage rates in the so-called subprime market.''

Demographic information on these borrowers is sketchy. But at least one study indicates that 18 percent of the loans in the subprime market went to black borrowers, compared to 5 per cent of loans in the conventional loan market.

In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980's.

''From the perspective of many people, including me, this is another thrift industry growing up around us,'' said Peter Wallison a resident fellow at the American Enterprise Institute. ''If they fail, the government will have to step up and bail them out the way it stepped up and bailed out the thrift industry.''

Under Fannie Mae's pilot program, consumers who qualify can secure a mortgage with an interest rate one percentage point above that of a conventional, 30-year fixed rate mortgage of less than $240,000 -- a rate that currently averages about 7.76 per cent. If the borrower makes his or her monthly payments on time for two years, the one percentage point premium is dropped.

Fannie Mae, the nation's biggest underwriter of home mortgages, does not lend money directly to consumers. Instead, it purchases loans that banks make on what is called the secondary market. By expanding the type of loans that it will buy, Fannie Mae is hoping to spur banks to make more loans to people with less-than-stellar credit ratings.

Fannie Mae officials stress that the new mortgages will be extended to all potential borrowers who can qualify for a mortgage. But they add that the move is intended in part to increase the number of minority and low income home owners who tend to have worse credit ratings than non-Hispanic whites.

Home ownership has, in fact, exploded among minorities during the economic boom of the 1990's. The number of mortgages extended to Hispanic applicants jumped by 87.2 per cent from 1993 to 1998, according to Harvard University's Joint Center for Housing Studies. During that same period the number of African Americans who got mortgages to buy a home increased by 71.9 per cent and the number of Asian Americans by 46.3 per cent.

In contrast, the number of non-Hispanic whites who received loans for homes increased by 31.2 per cent.

Despite these gains, home ownership rates for minorities continue to lag behind non-Hispanic whites, in part because blacks and Hispanics in particular tend to have on average worse credit ratings.

In July, the Department of Housing and Urban Development proposed that by the year 2001, 50 percent of Fannie Mae's and Freddie Mac's portfolio be made up of loans to low and moderate-income borrowers. Last year, 44 percent of the loans Fannie Mae purchased were from these groups.

The change in policy also comes at the same time that HUD is investigating allegations of racial discrimination in the automated underwriting systems used by Fannie Mae and Freddie Mac to determine the credit-worthiness of credit applicants.

DFU NOTE: I think it is safe to say that Jackie Robinson did better at his “first”

FRANKLIN RAINES: First Black Head Of A Fortune 500 Corporation - Fannie Mae
Ebony, April, 2001 by Charles Whitaker
E-mail Print Link Former budget director charts new course at Fannie Mae

ON the scrupulously neat desk of his spacious D.C. office, Franklin Raines, the chairman and CEO of Fannie Mae, the nation’s 26th largest corporation, keeps a little motivational momento. It is the cover story of a national business magazine, emblazoned with a montage of the faces of several dethroned chief executives. “WHY CEOs FAIL!” is the title that screams from the page.

“I took this out and showed it to my staff the other day,” Raines says. “It’s a little reminder of the need to stay focused.”

Now one would hardly think that a man of Franklin Raines’ accomplishments and disposition needs to hold on to a doom-and-gloom magazine story to remind him to stay on task. After all, you don’t graduate from Harvard with honors, become a Rhodes scholar, have successful careers on Wall Street and in the highest reaches of government (he was director of the Office of Management and Budget OMB in the Clinton administration), then become the first Black man to head a Fortune 500 company if you are easily distracted. Yet Raines, who projects an air of supreme confidence, confesses to occasionally feeling a bit of the pressure attendant with his high-profile role in corporate America.

“Any time you’re a `first’ in one of these highly visible jobs, there’s always some pressure to make sure that you don’t do something that would create an excuse for people not to choose a second or a third or a fourth,” he says.

Then, there’s the not-so-obvious pressure of keeping one of the largest and most profitable corporations in America, if not the world, on course.

“In some respects it’s a little more difficult when you step into the leadership of an already successful company,” Raines, 52, says of his two years at the helm of Fannie Mae, the quasi-governmental, multibillion-dollar concern designed to spur home ownership in America. “It’s almost easier when you take over a failing company, because the expectations are very clear—you’re supposed to turn things around. But when the company is doing well, it’s not quite as obvious what you’re supposed to do.”

Prior to the summer of 1998, when Franklin Raines was tapped to take the top job at Fannie Mae, one of the great guessing games among the Black executive set was trying to figure out who would be the first African-American to reach the highest rung of the corporate ladder. Though Clifton Wharton, former CEO of TIAA-CREF, the world’s largest private pension fund, had paved the way for the cadre of Black executives waiting in the wings, a Black executive had yet to be named CEO of one of the nation’s largest public companies.

Names like A. Barry Rand, now chairman and CEO of Avis Rent A Car, and Lloyd Ware, former chairman and CEO of Maytag Corp., were generally bandied about. But few would have taken odds that Raines, who had served five years as vice chairman of Fannie Mae before taking over the directorship of OMB, would make the initial crack in the glass ceiling.

Not that Franklin Raines wasn’t imminently qualified to be corporate America’s Jackie Robinson. But his stellar performance as the Clinton administration’s point person on a wide range of initiatives had led some to believe that Raines’ future lay in the public sector, and not necessarily in the corporate world he left behind.

But he traded in government work for a compensation package of close to $7 million and a chance to show his corporate peers how a monumental company can be both a profit center and a model of community responsibility. In many ways, he is breaking the mold for corporate leaders.

What Raines has done since he officially assumed his post at Fannie Mae in January of 1999 is set the company on a path for growth and expansion with moves that are concurrently designed to boost the firm’s market share and increase the number of minority home buyers in the nation. Although it doesn’t actually make mortgage loans, Fannie Mae, which was founded as a government agency in 1938, plays an important role in the realm of home financing. The company, which became a private, shareholder-owned concern in 1968, buys up mortgages from lending institutions and sells them on the secondary market. It’s a hugely profitable venture (Fannie Mae has more than $600 billion in assets), which also plays a public service by helping to keep mortgage money in circulation.

Among the programs the company has launched under Raines’ leadership is its “American Dream” initiative, which has as one of its key components channeling $2 trillion into the housing finance market in an effort to increase the homeownership rates of minorities and women-headed households, as well as spur the development of affordable housing in inner cities and older suburbs.

A huge fan of technology, Raines is also steering the company down the road toward increased use of the Internet to streamline consumer access to mortgages and loan information.

At the same time, he is trumpeting Fannie Mae’s human resources. He points to the company’s diverse workforce as a model for the rest of corporate America. Of Fannie Mae’s more than 4,000 employees, 54 percent are women, including 41 percent of the company’s officers and 44 percent of its management group. Minorities make up 41 percent of the company. Twenty-two percent of the company’s officers are minorities, as well as 24 percent of its management group.

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