Magazine article American Banker

Freddie, Fannie Tell How They Cut Risk in Low-Income Lending

Magazine article American Banker

Freddie, Fannie Tell How They Cut Risk in Low-Income Lending

Article excerpt

Executives of Fannie Mae and Freddie Mac took pains recently to reassure lenders they are forging ahead this year with programs to help them reach low-income borrowers, despite problems including rising delinquencies.

The entry of low-income households into the market gives lenders "a broader, more profitable way of doing business," said David Glenn, president of the Federal Home Loan Mortgage Corp., or Freddie Mac, at a recent Mortgage Bankers Association conference in New York for senior executives.

But this broader market carries risks. Loans to low-income borrowers who make small down payments are especially vulnerable to default, observers point out.

Fannie and Freddie have both begun accepting more of these riskier loans, said Jonathan Gray, mortgage company analyst at Sanford C. Bernstein & Co., New York. But he added that the agencies have moved to reduce risk by requiring that borrowers making small down payments carry additional mortgage insurance. Mortgage insurance reduces or entirely covers mortgageholders' losses from defaults.

Both Mr. Glenn and Franklin D. Raines, vice chairman of the Federal National Mortgage Association, or Fannie Mae, said their agencies recognize the difficulties of working with low-income borrowers.

Complex underwriting criteria, discrimination, and higher servicing costs can hamper lenders as well as borrowers, Mr. Raines said.

"But we are convinced these are not insurmountable issues," he said.

While Fannie Mae has an array of evaluation and underwriting systems it can employ when considering a loan, the company will not put technology and number crunching above its faith in lenders' own judgment, Mr. …

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