The chief executives of both Freddie Mac and Fannie Mae as well as the Chairman
of the Federal Deposit Insurance Corporation and the Federal Housing Commissioner
and Assistant Secretary of the Department of Housing and Urban Development testified
last week in a hearing before the U.S. House Committee on Financial
Services about solutions to the current subprime
Each of the four had some interesting things to say about what their organizations/agencies
are doing or could be doing to resolve the situation and we
will, in a couple of installments, cover them all.
Daniel H. Mudd, in a statement prepared for delivery
said that his corporation sounded the alarm about the impending subprime crisis
in early 2005 as they recognized the dangers of "layered-risk
lending and decided that the products that offered borrowers a mix of teaser
rates, interest-only, negative amortization, and payment option and low-doc
requirements coupled with adjustable rate loans were for more sophisticated
buyers. The corporation decided then that it made no sense for borrowers to
take on risks that they might not be aware of; to set them up for failure.
Fannie Mae thus, he said, instituted a disciplined approach
to that market, applying a "strict 11-point anti-predatory lending standards
to our loan purchases. Under this policy we reject loans the borrower can't
afford to pay from the start, those with excessive points or fees or subject
to mandatory arbitration; loans with abusive prepayment penalties with single-premium
credit insurance or debt cancellation insurance. And, of course, any loans that
"As a result, we gave up significant market share to our competitors.
At the same time, we continued our careful entry into the subprime market, by
and large supporting lenders, products and practices that met our standards,
and which helped us meet our HUD affordable housing requirements."
Consequently, Mudd said, Fannie Mae's exposure remains relatively minimal
-- less than 2.5 percent of the Corporation's book of business can be defined
as subprime and, while this has helped protect the company, its lenders and
borrowers during the crisis, it has also given the company some room to support
the market, as Congress intended. "We are a secondary market mortgage company
-- we can't solve all the problems, but we can't wash our hands of them, either."
Mudd did not agree that the larger market should cut off financing
for the subprime segment which would only make it more difficult and costly
for the least fortunate borrowers to finance or refinance their homes. He quoted
Robert Gnaizda of the Greenlining Institute as saying "Arbitrary and artificial
tightening of credit may be counterproductive - that is, it may dry up credit
for members of minority groups, the poor, and the 70 percent of Americans who
live paycheck to paycheck."
Mudd advocated getting ahead of the problem by assisting borrowers
who are not yet in trouble. "We want to help prevent further disruption of the
subprime market, which would make it tougher for these borrowers to refinance
into better, safer loans. To this end, Fannie has established a new company
initiative nicknamed "Homestay" which has three basic parts.
- The company works with lenders to help homeowners avoid
immediate foreclosure. The company has an operation that focuses on helping
people who are falling behind on payments to avoid default. If it is a Fannie
mortgage the company will work with lenders or services to offer a range of
workout solutions along with offering lenders financial incentives to help
borrowers avoid foreclosure. Mudd stated that the corporation worked out 27,000
loan modifications last year and also has programs in place to help lenders
identify vulnerable borrowers and methods to refer borrowers that are not
on Fannie's books to places they might receive help.
- Fannie is expanding lending options to assist lenders refinance homeowners
out of high-reset
ARMS or other loans that may be problematic. The HomeStay initiative "makes
these products more flexible and broadly available and includes low down payments,
long-term fixed rates, low fees and points, a prohibition of pre-payment penalties,
and a ban on arbitration clauses. Credit requirements are being adjusted so
that many homeowners facing payment shock will be able to refinance into Fannie
supported loans without requiring they clear up unpaid bills on their credit
reports. The company is also relying on its experience with blemished credit
to expand the previous subprime product from 500 lenders to some 2000 accredited
lenders while stretching maximum loan terms from 30 to 40 years.
Mudd said the Fannie is currently getting at least 15,000 applications for
subprime refinancing each month and that 80 percent of these applications have
been accepted. Thus, some 1.5 million homeowners facing resetting ARMs could
be eligible for Fannie Mae loan options.
- The company helping to counsel future homeowners, especially those
who are most vulnerable, or for those whom a product modification alone will
not save the day. The goal is to help people know what to do before payment
shock hits, and to avoid making the wrong mortgage choice in the first place.
He cited $5 million in grants this year to support a national foreclosure prevention
initiative being managed by NeighborWorks of America and the Homeownership Preservation
Foundation. Such nonprofit organizations join with local governments, other
nonprofit organizations, borrowers and lenders to help families overcome obstacles
that could result in the loss of their homes.
- Mudd also cited additional educational programs such as
a "Know Your Mortgage" effort, providing lenders with fact sheets with easy-to-understand
descriptions of mortgage terms in English and Spanish for use with borrowers
and an expanded distribution of its Home Counselor Online system to lenders,
organizations and agencies. This web-based application is designed to help
people understand the home-buying process, how to protect or fix their credit,
what to demand and what to avoid.
"Finally," Mudd said, "as we help the subprime market through
this turmoil, Fannie Mae will continue to support better lending guidelines.
When banking regulators finalize the new guidelines regarding teaser ARMs, which
should be soon, we will work with our industry partners to comply with them.
From the start, we said we believed the best course of action would be to follow
the regulatory process to avoid further disruption of the subprime market and
the borrowers who depend on it. That's what we're going to do."