HUD Prepares To Set New Housing Goals
Homebuyers who finance and homeowners who refinance benefit from the activity of two privately owned but federally chartered corporations, Fannie Mae and Freddie Mac. These government-sponsored enterprises (GSEs) helped establish an efficient secondary market for home mortgages, which in turn has reduced regional differences in mortgage interest rates and lowered mortgage interest rates in general by making mortgages easier to buy and sell.
The GSEs benefit in several ways from having a Federal charter, the most important of which is "agency status," an informal designation that allows Fannie Mae and Freddie Mac to borrow at lower interest rates because the markets perceive lower risks due to the government connection. In the Federal Housing Enterprises Financial Safety and Soundness Act of 1992, Congress imposed certain obligations on the GSEs in exchange for the benefits they receive. In particular, Congress charged the U.S. Department of Housing and Urban Development (HUD) with setting annual goals to ensure that Fannie Mae and Freddie Mac use the benefits received from the Federal Government to help lower income and minority households and that underserved areas receive adequate mortgage financing.1
HUD set interim goals for 1993 through 1995 and, in December 1995, issued formal goals for the period 1996 through 1999. Early next year, HUD will issue for public comment new proposed goals for the period starting in year 2000. This article presents some of the data that HUD will use and discusses some of the issues HUD will confront in setting those goals.2
BackgroundFannie Mae and Freddie Mac are very large business operations, in terms of both mortgages purchases and total dwelling units financed. In 1997 Fannie Mae's mortgage purchases of $165 billion financed almost 1.9 million dwelling units; Freddie Mac's mortgage purchases of $118 billion financed more than 1.2 million units. Both GSEs' purchases were slightly lower in 1997 than in 1996, reflecting market trends, and their purchases were substantially lower than those made during the financing wave of 1993, when Fannie Mae purchased $294 billion in mortgages and Freddie Mac purchased $229 billion, financing 3.2 million and 2.4 million dwelling units respectively.
The GSEs' purchases accounted for a rising share of the single-family conventional conforming market between 1980 and 1993 (see figure 1). In the early 1980s, the GSEs' share ranged from 12 to 34 percent of the dollar volume of originations in the single-family conforming conventional market. The GSEs' share rose to about 45 percent during the high-volume origination years of 1986 and 1987, and then rose dramatically in the early 1990s to reach a peak of 71 percent during the high refinancing year of 1993. In 1994 the GSEs' share of the conforming conventional market dropped to 55 percent, due primarily to a greater volume of conventional adjustable-rate mortgages as interest rates rose after the first quarter. The GSEs' market share fell further to 43 percent in 1995 and remained between 40 and 50 percent in 1996 and 1997.
The housing goals set by HUD for 1996 through 1999 are:
Current Goals and Recent PerformanceTable 1 presents both the performance as reported by Fannie Mae and Freddie Mac for each year from 1993 through 1997 and the housing goals for the 1996 to 1999 period.3 Note that HUD set somewhat lower goals for 1996 than for the 1997-1999 period.
Both GSEs reported that they exceeded all of the goals for the past 2 years. For example, 45.5 per-cent of Fannie Mae's purchases and 42.9 percent of Freddie Mac's purchases were reported as qualifying for the low- and moderate-income goal in 1997, surpassing HUD's target of 42 percent. The geographically targeted goals were all reportedly surpassed by at least two percentage points in 1996-97 and the special affordable goals were reportedly exceeded by at least one percentage point.
The special affordable multifamily dollar-based subgoals were set at a time when Freddie Mac was just reentering the multifamily business, so they have been surpassed by Fannie Mae but a challenge for Freddie Mac. Freddie Mac's annual multifamily special affordable purchases increased steadily between 1993 and 1997.
For the period as a whole, the GSEs have made gains in the income-targeted goals, with combined special affordable performance doubling between 1993 and 1997 and combined low- and moderate-income purchases increasing from 32 percent in 1993 to 44 percent in 1997. Fannie Mae has consistently surpassed Freddie Mac in goal performance, but Freddie Mac's relative performance has increased -- from 72 percent of Fannie Mae's special affordable record in 1993 to 80 percent in 1997 and from 88 percent of Fannie Mae's low- and moderate-income performance in 1993 to 94 percent in 1997.
Gains have also been made on the geographically targeted goal, with average performance rising by 25 percent between 1993 and 1997. In 1994 Fannie Mae's performance jumped by 6.1 percentage points in that year alone and has since remained at the 1994 level. Freddie Mac has shown more gradual, but relatively steady, gains in this area, though its performance relative to Fannie Mae's was lower in 1997 than in 1993.
Characteristics of GSE Mortgage PurchasesTable 2 lists some characteristics of borrowers and of mortgages purchased by Fannie Mae and Freddie Mac in 1996 and 1997. During this period approximately 65 percent of the GSEs' mortgages went to borrowers with incomes above area median income (AMI), with approximately half going to borrowers whose incomes exceeded 120 percent of AMI. This pattern was essentially unchanged from 1993 to 1995. In 1997 approximately 10 percent of Fannie Mae's loans went to very low-income (less than 60 percent of AMI) borrowers; Freddie Mac's share was 8 percent. More than 80 percent of home loans purchased by the GSEs in 1996-97 were made to non-Hispanic white borrowers. In 1993 only 2 to 3 percent of the GSEs' home purchase mortgages went to African-American borrowers; this share rose to 3 to 4 percent by 1995 but fell slightly by 1997. Similar gains were also made for Hispanics, from 3 to 4 percent in 1993 to 4 to 6 percent in 1995, with some decline in 1996-97.
As housing has become more affordable, first-time homebuyers have played a more significant part in the market. These are typically people in the 25- to 34-year-old age group who purchase modestly priced homes. Although the proportion of the population in this age group decreased from 18 percent in 1985 to 15 percent in 1996, first-time homebuyers increased from about 40 percent of all buyers in the 1980s to 45 percent or more in recent years.4 Compared to FHA, the GSEs lag in support for first-time homebuyers. In 1997, 34.5 percent of Fannie Mae's home purchase loans were for first-time homebuy-ers, somewhat above Freddie Mac's first-time home-buyer share (28.4 percent). Both GSEs' shares were well below FHA, where in recent years first-time homebuyers have accounted for approximately three-fourths of its home purchase loans.
Most of the mortgages that the GSEs purchase are originated with high downpayments. As shown in table 2, 68 to 69 percent of the loans acquired by Fannie Mae in 1996-97 had loan-to-value ratios (LTVs) at or below 80 percent. Such low LTV (high downpayment) loans accounted for 70 percent of Freddie Mac's 1997 purchases, though the share of loans with very high downpayments (LTVs at or below 60 percent) was slightly larger for Fannie Mae (19 percent) than for Freddie Mac (18 percent). Since 1995 Freddie Mac has entered the very high LTV (greater than 95 percent) market, though such loans still amounted to only 0.6 percent of its loans in 1997, compared with 2.2 percent of Fannie Mae's loans last year.
Other Factors Considered in Setting GoalsA 1996 HUD study noted a surprising character-istic of the GSEs' loan purchases: the GSEs' lower income loans frequently do not appear to be addressing problems of affordability, such as lack of cash for downpayment.5 A noticeable pattern among lower income loans purchased by the GSEs is the predominance of loans with high downpayments. As reported in the HUD study, almost 60 percent of the GSEs' purchases of very low-income loans in 1995 had downpayments of 20 percent or more, compared with about 50 percent of their purchase of higher income loans. The explanation for the seemingly large percentage of high downpayment loans among the GSEs' lower income loan purchases requires further study.
In carrying out its congressional mandate, HUD will consider how the goals match performance elsewhere in the conventional mortgage finance industry. Table 3 uses Home Mortgage Disclosure Act (HMDA) data to compare the affordable lending performance of Fannie Mae and Freddie Mac with conventional lenders. The most appropriate comparisons for the GSEs are with the retained portfolios of depository institutions [banks and savings associations (SAs)] also operating in the conforming market. However, data from FHA are also presented to provide a complete picture of the mortgage market.
Using data from sources other than HMDA, table 3 excludes from the conforming market totals loans by 7 lenders that originate primarily manufactured home loans and loans by 41 lenders that originate primarily below-investment-grade "B&C," quality loans. A longstanding issue concerns whether conventional manufactured home loans should be included in market data that are being compared with GSE data. Because manufactured home loans generally do not meet the GSEs' underwriting standards, Fannie Mae and Freddie Mac contend that manufactured home loans should not be considered in such comparisons. Similar concerns have been raised by the GSEs about B&C loans, which are also included in HMDA data. Because manufactured home and B&C loans are a growing source of affordable lending, the socioeconomic characteristics of these borrowers are provided separately in table 3.6
The relevant comparison for the GSEs is with the non-GSE portion of the conventional conforming market, which consists mainly of portfolio lenders, such as banks and SAs. In general, loans sold to the GSEs in 1996 were less likely to be for underserved borrowers and their neighborhoods than were loans retained by portfolio lenders, especially those held by commercial banks. For example, very low-income borrowers accounted for 8.3 percent of loans purchased by the GSEs, compared with 13.5 percent of loans retained by banks. African-American borrowers accounted for 3.6 percent of loans sold to Freddie Mac and 4.4 percent of loans sold to Fannie Mae, compared with 4.9 percent of loans retained by banks. On the other hand, Hispanic borrowers accounted for a much larger share of loans sold to Fannie Mae (6.6 percent) than loans retained by banks (4.8 percent). The neighborhood data in table 3 show similar differentials between the GSEs and banks. Low-income census tracts account for 7.4 percent of loans sold to Freddie Mac and 8.5 percent of loans sold to Fannie Mae, compared with 12.2 percent of loans retained by banks. High-concentration African-American neighborhoods account for 3 percent of Freddie Mac's loans and 3.6 percent of Fannie Mae's loans, compared with 4.8 percent of bank loans.
A recent study by the Federal Reserve Board examined the degree to which different mortgage market institutions -- the GSEs, FHA, depositories, and private mortgage insurers -- are taking on the credit risk associated with funding affordable mortgages.7 The Fed study combined downpayment and market share data such as those reported above with data on projected foreclosure rates to estimate the credit risk assumed by each institution for each borrower group. The Fed study found that Fannie Mae and Freddie Mac together provided only 4 to 5 percent of the credit support for lower income and minority borrowers and their neighborhoods. This relatively small role in providing credit support is due to the GSEs' low level of funding for these groups and to the fact that they purchase mainly high down-payment loans.
More Analysis To ComeThe Federal Housing Enterprises Financial Safety and Soundness Act mandates that HUD consider five or six factors in setting each housing goal:
Congress also established an independent office within HUD, the Office of Federal Housing Enterprise Oversight, with the separate responsibility of determining whether the GSEs have sufficient capital and other resources to meet their financial obligations in unfavorable economic conditions. This article draws heavily on two forthcoming articles from HUD's Housing Finance Working Paper series: Characteristics of Mortgages Purchased by Fannie Mae and Freddie Mac: 1996-97 Update, by Paul B. Manchester; and The GSEs' Funding of Affordable Loans: A 1996 Update, by Harold L. Bunce and Randall M. Scheessele. Data on manufactured home and B&C loans are presented separately to highlight characteristics of the borrowers taking out these loans. Our separate treatment of these loans does not necessarily mean that HUD agrees with the GSEs' arguments for excluding these loans from the conforming market definition with analyzing their affordable lending performance. See Randall M. Scheessele, "The 1996 HMDA Data: A Closer Look," U.S. Housing Market Conditions, November 1997, for the source of these data and a discussion of the effects on HMDA data of the recent increase in HMDA reporting by manufacturing home and B&C lenders.
Congress also established an independent office within HUD, the Office of Federal Housing Enterprise Oversight, with the separate responsibility of determining whether the GSEs have sufficient capital and other resources to meet their financial obligations in unfavorable economic conditions.
This article draws heavily on two forthcoming articles from HUD's Housing Finance Working Paper series: Characteristics of Mortgages Purchased by Fannie Mae and Freddie Mac: 1996-97 Update, by Paul B. Manchester; and The GSEs' Funding of Affordable Loans: A 1996 Update, by Harold L. Bunce and Randall M. Scheessele.
Data on manufactured home and B&C loans are presented separately to highlight characteristics of the borrowers taking out these loans. Our separate treatment of these loans does not necessarily mean that HUD agrees with the GSEs' arguments for excluding these loans from the conforming market definition with analyzing their affordable lending performance. See Randall M. Scheessele, "The 1996 HMDA Data: A Closer Look," U.S. Housing Market Conditions, November 1997, for the source of these data and a discussion of the effects on HMDA data of the recent increase in HMDA reporting by manufacturing home and B&C lenders.