Magazine article Mortgage Banking

Goal-Oriented: Fannie Mae and Freddie Mac Every Year Are Required to Meet Affordable Housing Goals Set by the Department of Housing and Urban Development (HUD). as We Approach a New Deadline for Setting the 2004 Goals, HUD May Be Considering Putting More Teeth into the Goals

Magazine article Mortgage Banking

Goal-Oriented: Fannie Mae and Freddie Mac Every Year Are Required to Meet Affordable Housing Goals Set by the Department of Housing and Urban Development (HUD). as We Approach a New Deadline for Setting the 2004 Goals, HUD May Be Considering Putting More Teeth into the Goals

Article excerpt

ROUGHLY 68 PERCENT OF AMERICANS ARE HOMEOWNERS. Seventy-four percent of white non Hispanics are homeowners, while only 50 percent of African Americans have achieved the goal of homeownership. In addition, more than 14 million Americans spend half of every dollar earned on housing or live in substandard units, according to The State of the Nation's Housing 2003, a July report by Cambridge, Massachusetts-based Harvard University's Joint Center for Housing Studies.

What does this say about how well American housing policy is working? Are these good marks, or is this just an average, or even below-average, report card?

President George W. Bush, like presidents before him, has made closing the gap in the homeownership numbers a priority. He announced earlier this year an initiative to add 5.5 million new minority homeowners by 2010. And, according to the president's 2004 budget proposal, the two government-sponsored enterprises (GSEs)-Fannie Mae and Freddie Mac--will be tapped to help deliver on that goal.

Fannie Mae and Freddie Mac play a critical role in the secondary market by buying mortgages from mortgage lenders and continually replenishing the supply of capital available for housing. They also can help launch innovative loan programs designed to get low-and moderate-income borrowers into homes by agreeing to buy the loans and setting the underwriting ground rules.

Fannie Mae and Freddie Mac are federally chartered, shareholder-owned corporations created by Congress to achieve public purposes. Specifically, they are required to establish a secondary market for residential mortgages below a certain loan size and to assist that market by increasing the liquidity of mortgage investments. But Fannie Mae and Freddie Mac are also two of the most profitable Fortune 500 companies, with return on equity of 30 percent to 36 percent and market capitalizations, as of July 25, 2003, of $64 billion and $35 billion, respectively.

In 2002, the two GSEs assisted in the funding of $1.375 trillion of mortgages, according to the Office of Federal Housing Enterprise Oversight (OFHEO). Collectively, the GSEs hold or guarantee an estimated 75 percent to 80 percent of all conventional conforming mortgages and almost half of all residential mortgages, according to OFHEO's 2003 Report to Congress, which is the regulator's annual report to the Senate Committee on Banking, Housing and Urban Affairs and the House Committee on Financial Services.

As OFHEO states in its draft strategic plan for FY 2003-2008, "In performing their mission, they link capital market investors and primary lenders and have become two of the nation's largest financial institutions. The linkage helps provide continuous access to funds for mortgage lenders and lower interest rates for borrowers."

In exchange for carrying out these public purposes, Congress granted Fannie Mae and Freddie Mac "numerous explicit benefits from the Federal government," according to OFHEO's draft strategic plan for FY 2003-2008. The benefits primarily include: "an exemption from state and local income taxes, an exemption from the registration requirements of the Securities and Exchange Commission (SEC), and conditional credit lines available with the U.S. Treasury. However, the most important benefit is implicit. Because of investors' belief in an implied U.S. government guarantee on their securities, the enterprises have been able to borrow money more cheaply and without the practical volume restrictions faced by utile, AAA-rated companies," OFHEO states.

The strategic plan adds that in July 2002 Fannie and Freddie agreed voluntarily to register their common stock with the SEC. But the voluntary agreement does "not subject the companies' securities to Securities Act registration requirements applicable to the public offering of new securities."

Yet in the early 1990s, there was a sense on the part of policy-makers that the role the GSEs played in supporting affordable housing needed to be more precisely targeted. …

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