Closing the gap or closing the door?

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This report is the work of the Texas Low Income Housing Information Service

Fannie Mae’s responsibility

In 1992 Congress voiced concern about an “information vacuum” with regard to the low- and moderate-income as well as minority lending records of Fannie Mae and Freddie Mac. Since then, Congress has focused on the cost and risk versus benefit of the federal government’s large public subsidies to Fannie Mae and other GSEs.

The Congressional Budget Office (CBO) found that the federal subsidy to Fannie Mae for the year 2000 was $6.1 billion, but the CBO reported that only about half of this subsidy was transferred to the benefit of the borrowers. The CBO report showed that Fannie Mae retained the other half of the public subsidy, presumably for the benefit of the corporation and its shareholders. (It should be noted that Fannie Mae has raised objections to the CBO’s methodology).

Based on the CBO estimates, the size of Fannie Mae’s public subsidy is huge in comparison to the levels of federal funding for affordable housing. The $6.1 billion annual public subsidy the government provides to Fannie Mae is more than three times what it spends on HUD’s housing production program — the HOME Investment Partnership Program.

Congress acted on its concerns by directing the U.S. Department of Housing and Urban Development (HUD) to develop a set of national lending performance goals for the GSEs. The Federal Housing Enterprises Financial Safety and Soundness Act of 1992 requires HUD to establish three affordable housing goals for each of the GSEs. The Act directs HUD to recognize “the ability of the enterprises [GSEs] to lead the industry in making mortgage credit available for low- and moderate-income families.”

These housing goals are intended to measure and encourage the GSEs’ support for very low-, low-and moderate-income lending as well as lending in underserved geographic areas. Congress gave HUD the responsibility of monitoring and reporting on GSE performance in meeting these goals.

Congress clearly believes that the GSEs should use their power to profoundly influence the availability of home mortgage credit to these targeted homebuyers. Section 1302 of the Act provides that the GSEs have an “affirmative obligation to facilitate the financing of affordable housing for low- and moderate-income families.”

In 2000 HUD’s goals for each GSE were:

(1) Low- and moderate-income goal: at least 50 percent of the homes financed by each GSE’s mortgage purchases must be for families with incomes no greater than the area median income;

(2) Geographically targeted goal for underserved areas: at least 31 percent of the homes financed by each GSE’s mortgage purchases must be for units in underserved areas; and

(3) Special affordable goal: at least 20 percent of the homes financed by each GSE’s mortgage purchases must be for very low-income families or for low- income families living in low-income areas.
HUD concluded that both Fannie Mae and Freddie Mac met these goals for the year 2000.

The question of whether the goals HUD adopted for the GSEs are appropriate is controversial. Housing and fair lending organizations, including TxLIHIS, have argued that they are too weak and have urged HUD to adopt more aggressive goals.

The results of studies such as this one point to the failure of these congressionally mandated goals. In today’s mortgage market, the most important mission of the GSEs is to secure a market share in minority and low- and moderate-income neighborhoods equal to that in higher-income and White neighborhoods.  Our study demonstrates that this has not occurred. 

In 2004 HUD slightly strengthened the GSE goals, but our study raises concerns about their effectiveness. The GSE housing goal system relies on only borrower income, neighborhood race, and neighborhood income in defining underserved borrowers and neighborhoods. Our findings show that the dominant factor associated with low levels of borrower support in Dallas/Fort Worth in 2000 is borrower race. Although there are undoubtedly many other factors that correlate with borrower race, such as credit history and ability to meet down payment requirements, borrower race identifies underserved borrowers more effectively than the other three factors.

Further, we have found that reliance on a system of national goals masks the poor performance of Fannie Mae at a regional level.

In sum, the current goals do not adequately address the fundamental problems at Fannie Mae.