In our report Closing the Gap or Closing the Door, we ask two questions:
• How well does Fannie Mae serve the home mortgage credit needs of ethnic and racial minority borrowers in the Dallas/Fort Worth area?
• Is Fannie Mae satisfying its obligation to lend in minority neighborhoods?
Our research shows that far from being a leader in serving minorities and low- and moderate-income borrowers, the majority of the single family mortgage loans Fannie Mae purchases are directed at White and upper income families. Furthermore, Fannie Mae’s poor performance engenders neighborhood decline and disinvestment in inner city and minority neighborhoods in Dallas and Fort Worth. This contributes to the growing gap in White and minority homeownership rates.*
Fannie Mae is a major player in both the real estate industry and the overall American economy. Congress directs Fannie Mae to channel its resources into increasing the availability and affordability of home ownership for low-, moderate- and middle-income families. Congress further directs the GSEs to promote access to mortgages in underserved areas. The company’s business practices, including its underwriting criteria and loan guidelines, greatly influence Americans’ access to mortgage credit. It is an indisputable fact that GSEs shape the larger real estate market. Thus, Fannie Mae is very important to American homeownership and the economic health of communities.
Fannie Mae exists as a secondary market for mortgage loans. Lenders can increase their business in local communities by making loans that they can sell to Fannie Mae. To sell a loan to Fannie Mae a lender must qualify the home buyer using Fannie Mae-designated criteria. Consequently, Fannie Mae in many ways determines who qualifies for home loans. In 2000, Fannie Mae purchased 31 percent of all of the conventional conforming** home purchase and refinance loans in Dallas/Fort Worth. Given that the company purchased almost a third of all mortgages in the Metroplex, it is important to examine what sort of borrower qualified for these loans, and in which neighborhoods.
When reading this report, please keep in mind that our analysis is a comparison between loans Fannie Mae purchased and the total conventional loans originated in the Metroplex. The report examines Fannie Mae’s volume of the home mortgage market against the larger backdrop of the entire home mortgage market in the area. For example, we report that Fannie Mae’s share of mortgage loans to African-American borrowers was only 16 percent. This means that Fannie Mae only purchased 16 percent of the conventional loans made to African-American borrowers. The remaining 84 percent of the conventional mortgage loans made to African-American borrowers were sold to other secondary purchasers such as Freddie Mac or were held by the originating lender.
It is important to keep in mind that if minority borrowers cannot access prime mortgage credit through a Fannie Mae purchased loan, the company founded specifically to enhance that market, minorities may have no choice but to enter the expensive and often exploitative subprime market. Subprime loans can potentially cost individual borrowers more than twice the cost of a Fannie Mae purchased loan. For this reason, we devote a chapter in our report to subprime lending.
How well does Fannie Mae serve ethnic and racial minority borrowers?
Finding #1: Fannie Mae purchases a smaller share of loans made to African-American and Hispanic borrowers than similar loans made to White and Asian-American borrowers.
In 2000, Fannie Mae purchased 29 percent of the conventional loans to White borrowers in the Dallas/Fort Worth metropolitan area. Similarly, Fannie Mae dominates the Asian-American market, purchasing 32 percent of conventional mortgage loans originated to Asian borrowers in the area (see Exhibit 1).
In sharp contrast, Fannie Mae’s market share of conventional loans to Hispanic borrowers was only 19 percent or about one fifth of the market.
The company’s record with African-American borrowers is even worse. Fannie Mae’s market share of conventional loans originated to African-American borrowers was only 16 percent, or roughly half the size of its market share of loans originated to White borrowers.
How well does Fannie Mae serve low- and moderate-income borrowers?
Finding #2: Fannie Mae purchases a significantly greater percentage of loans made to upper income borrowers than of loans to lower income borrowers.
As evidenced in Exhibit 2, Fannie Mae bought a substantial share of the home loans made to upper income home buyers and only a small share of the home loans made to lower income home buyers. Specifically, Fannie Mae purchased 34 percent (more than one third) of the market share of conventional loans to upper income borrowers. Conversely, the company purchased only 19 percent, or one fifth, of the conventional loans originated to low-income borrowers.
Finding #3: Fannie Mae’s market share of loans to African-American borrowers is lower than to Whites regardless of the borrower’s income.
For all ethnic groups, Fannie Mae’s market share increases with each step up the income ladder. The greater the borrower’s income, the more likely they are to have a Fannie Mae purchased loan. Thus, the data reveal the company’s preference for loans originated to upper income borrowers over those originated to lower income borrowers (see Exhibit 3).
At every income level, Fannie Mae’s market share for African-American and Hispanic borrowers is dramatically lower than for White borrowers at comparable income levels. Fannie Mae has a 22 percent market share of conventional loans originated to low-income White borrowers, and only a 19 percent market share of conventional loans originated to upper income African-American borrowers.
These figures demonstrate that discrepancies in Fannie Mae’s market share cannot be dismissed as an issue of minority borrowers’ incomes or ability to repay.
Is Fannie Mae leading the lending industry in serving minority neighborhoods?
Finding #4: Fannie Mae has a smaller market share in minority neighborhoods than in White neighborhoods.
Exhibit 4 (page 6) shows Fannie Mae’s market share is inversely related to the number of minorities living in the census tract. Fannie Mae has a relatively small market share — 16 percent — in neighborhoods that are at least 75 percent minority, and a significantly higher market share — 34 percent — in neighborhoods with a White population of at least 85 percent.
Fannie Mae’s failure to adequately invest in minority neighborhoods has dire negative consequences for these neighborhoods. Families seeking to buy homes and refinance loans in these communities are increasing forced to rely on subprime loans.
Finding #5: Subprime lenders fill the market gap left by Fannie Mae’s underservice to African-American, Hispanic and low-income borrowers and underserved neighborhoods.
Fannie Mae’s role in providing access to prime mortgage loans to minority and low- and moderate-income borrowers is especially important in light of the dramatic rise in subprime lending across Texas.
Subprime lenders market their home purchase and refinance loans to the same borrowers that are underserved by Fannie Mae in Dallas/Fort Worth. Subprime lenders account for 36 percent of conventional home purchase and refinance mortgage loans originated to African-American borrowers, as compared with Fannie Mae’s market share of only 16 percent.
By comparing Exhibit 5 with Exhibit 3 on the preceding page, it is clear that subprime lenders’ market share among African-American and Hispanic borrowers is virtually a mirror opposite of Fannie Mae’s market share.
In summary, five of the report’s major findings regarding Fannie Mae’s activities in Dallas/Fort Worth in 2000 are:
1. Fannie Mae purchases a smaller share of loans made to African-American and Hispanic borrowers than similar loans made to White and Asian-American borrowers.
2. Fannie Mae purchases a significantly greater percentage of loans made to upper income borrowers than loans made to lower income borrowers.
3. Fannie Mae’s market share of loans to African-American borrowers is lower than its share of loans to White borrowers, regardless of the borrower’s income.
4. Fannie Mae has a smaller market share in minority neighborhoods than in White neighborhoods.
5. Subprime lenders fill the market gap left by Fannie Mae’s underservice to African-American, Hispanic and low-income borrowers and underserved neighborhoods.
Congress has voiced concern about an “information vacuum” with regard to the low- and moderate-income and minority lending record of Fannie Mae and Freddie Mac. In this report, we attempt to fill that vacuum.
This report raises profound questions about the value of Fannie Mae’s contribution to the local lending market as well as its compliance with its obligations to the American people as defined by Congress.
The report can be downloaded.
For more information, or to receive a copy of the full report and video summary on CD-ROM, please e-mail news@texashousing.org.
_____
* The Black homeownership rate in Dallas fell from 37% to 36% from 1990-2000, the Hispanic rate was unchanged (34%) and White rate rose from 50% to 53%.
** Conforming loans are loans in amounts below the loan limit ceiling set by Congress for loan purchases by GSEs including Fannie Mae. Conventional loans are loans other than FHA, Veterans Administration and USDA Rural Development insured loans.