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Lending assistance.


Both secondary mortgage market giants, Freddie Mac and Fannie Mae, have established "targeted" affordable housing departments during the past few years. Each agency is quick to point out that these developments are part of their long-standing efforts in this regard, citing statistics and numerous earlier examples of their affordable housing activities. Each also will point to the average size of the mortgages they purchase as further evidence of their affordable housing efforts.

All these statistics, examples and average loan balances are true. Each organization has and is making a variety of efforts in this area. These efforts include cash equity investments, special mortgage underwriting guidelines, mortgage counseling programs and direct grants. The cumulative numbers are certainly substantial. Particularly, when you consider that the central mission of each organization is to help provide liquidity to the national mortgage market through linkage with the capital markets. In providing this linkage, each agency helps reduce the cost of mortgage credit. By reducing the overall cost of mortgage credit, Fannie Mae and Freddie Mac make housing more affordable for all Americans.

However, as Congress formulated legislation to address the savings and loan industry crisis, it also made changes to the charters of Freddie Mac and Fannie Mae. Hidden somewhat behind the publicity on Freddie Mac's new board of directors, behind the coverage devoted to which department of the government will regulate the secondary market giants and behind the headline-grabbing revisions to the regulation of the thrift industry, was the first direct mention of a responsibility to foster affordable housing on the part of the two agencies. The existing language in the charter of each organization now reads "...provide ongoing assistance to the secondary market for home mortgages (including mortgages securing housing for low-and moderate-income families involving a reasonable economic return to the Corporation)..." Fannie Mae already had created its Office of Low- and Moderate-Income Housing in September 1987, prior to passage of the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA) and Freddie Mac created its Affordable Housing Initiatives Department approximately one year after passage of the legislation.

When asked what prompted Fannie Mae to create a separate department for affordable housing, Fannie Mae Senior Vice President of Low- and Moderate-Income Housing Initiatives Marty Levine said, "Fannie Mae has always felt [it] had a responsibility to support affordable housing." While acknowledging the legislation had some impact, Levine says, "Fannie Mae's creation of the department and increased efforts in this area in the 1980s is more a function of the improved profitability of the organization and the likelihood of that profitability continuing for the foreseeable future. As we became more profitable and could see that trend continuing, we could expand our targeted programs and outreach efforts."

Carl Riedy, Freddie Mac vice president for affordable housing initiatives, says the rationale for creating his department was fourfold.

* The growing impact of the

secondary market on all facets of

the mortgage industry. * Increased Community

Reinvestment Act (CRA) pressures on the

agency's customers from regulators

and recent legislation increased the

requests for assistance in this area. * Heightened awareness of housing

affordability issues in general. * Corporate charter changes

generated by FIRREA.

Whatever the genesis, each organization now has a separate affordable housing initiatives department within its corporate structure. The affordable housing department is a part of the marketing divisions inside each agency. The companies also have made affordable housing initiatives a specific marketing responsibility for their regional sales forces.

Overview of initiatives

Fannie Mae's low- and moderate-income housing initiatives can be divided into four broad categories: public finance, community lending, low-income rental housing equity investments and other special initiatives.

Public finance initiatives involve working with state and local housing finance agencies (HFAs) to reduce the cost of mortgages that are financed with mortgage revenue bonds. By selling bonds directly to Fannie Mae, HFAs can reduce their borrowing costs; making more funds available and at lower rates than would normally be possible. In this area, Fannie Mae is also providing credit enhancement for tax-exempt mortgage revenue bonds. This credit enhancement using Fannie Mae mortgage-backed securities makes the bonds eligible for "triple-A" ratings thus reducing the HFA's financing costs and simultaneously eliminating the need for pool insurance. These same techniques can be used for both home and multifamily bond issues.

Fannie Mae's community lending initiatives involve specially designed community lending programs fashioned in partnership with lenders, mortgage insurers, public agencies and nonprofit organizations. Typically these programs involve low down payments, reduced closing costs and more flexible qualifying ratios for borrowers. One significant feature is the "3/2 Option," where homebuyers meet the minimum 5 percent down payment requirement with 3 percent of the funds coming from their personal resources and up to 2 percent coming from a gift from a family member or a grant or unsecured loan from a nonprofit organization or public entity.

The low-income rental housing equity investments are corporate financial commitments to invest cash equity in low-income rental housing in exchange for federal tax credits. In order for projects to qualify for these tax credits, at least 20 percent of the units in each project must be set aside for low-income tenants for a period of not less than 15 years. Since 1987, Fannie Mae has committed $162.8 million to low-income tax-credit investments. (See Chart 1.)

Other special affordability initiatives at Fannie Mae include efforts such as demonstration projects to create models for the development of employer-assisted housing in high-cost markets; a special arrangement with the Mortgage Bankers Association of America (MBA) to provide debt or equity financing for rental housing projects in six different communities; and the annual Fannie Mae Foundation Awards for innovative community-development efforts.

Freddie Mac's initiatives are most easily differentiated by property type into separate homeownership and rental property strategies.

The homeownership strategy can be segregated further into targeted lender initiatives and public partnerships. In a sense, this division could be characterized as existing- and new-customer initiatives. The strategy is to work with targeted lenders (existing customers) to design and develop tailored programs that meet the needs of their community and marketplace. At the same time, Freddie Mac is working with public partnerships (new customers) such as state/local housing finance agencies and nonprofit organizations to help meet their needs in providing and maintaining affordable housing units.

Many of the tools and/or techniques used to further these strategies are similar with both groups. They include low down payments (typically 5 percent), reduced closing costs and flexible qualification requirements and alternative verification procedures for credit histories. A significant feature that has increasingly appeared in Freddie Mac programs is mandatory borrower counseling prior to and following loan closing. Pursuant to this, two major counseling seminars were held in mid-June sponsored in conjunction with the MBA and the National Low Income Housing Coalition (NLIHC).

Freddie Mac's rental property strategy also has several components. The first of these is its low-income, rental, tax-credit equity investment activities. During the past three years, Freddie Mac has committed $57.646 million to these investments.

The second component of Freddie Mac's rental strategy was initiated earlier this year with the announcement of a two-year commitment in partnership with the National Community Development Initiative (NCDI). NCDI will operate through the country's two leading community development support organizations--the Local Initiatives Managed Assets Corporation (LIMAC) and The Enterprise Foundation. Under the terms of the agreement, LIMAC will purchase low-income rental housing mortgages from local lenders and sell those multi-family mortgages to Freddie Mac. Under this program, LIMAC will provide credit support for the mortgages as well as local community lending expertise. Freddie Mac's Riedy says, "I am hopeful that this agreement will act as a framework for similar ventures with other nonprofit organizations and foundations."

The final component of Freddie Mac's rental strategy is currently under development with an announcement anticipated by early 1992. The objective is to design a program to help preserve the existing inventory of low-income housing stock in this country. During the past two decades, a considerable supply of low-income housing stock has been generated through the HUD 236 program (Mortgage Insurance and Interest Reduction Payments for Rental Projects) and Section 8 housing assistance payments programs. Under these programs, projects were required to maintain units as low-income housing or had rents subsidized by Section 8 assistance contracts. During the next few years, the rental assistance contracts and low-income unit restrictions on these projects will be expiring. There is significant risk that with the expiration of these agreements, a large percentage of these units will become market-rate rentals. Riedy envisions Freddie Mac developing a program to help keep these units for low-income rental housing.


Now that we have discussed the nuances that distinguish the two agencies approaches, what things are the two agencies doing alike? Each organization is:

* investing equity in low-income,

rental housing, tax credits. * working with lenders, mortgage

insurers, housing finance agencies,

public agencies and nonprofit

organizations to develop programs and

initiatives defined by local markets

and needs. * engaged in joint initiatives with

organizations such as the LIMAC, the

Enterprise Foundation and the

MBA. * making affordable housing

initiatives a responsibility of its regional

marketing staff. * tracking separate risk elements on

all affordable housing purchases in

order to develop national databases.

There are also a number of similarities in the underwriting terms and flexibilities that have been used in home mortgage commitments. * Generally, 5 percent down payment

requirements are allowed. Fannie

Mae and Freddie Mac have allowed

2 percent of the 5 percent down

payment to be in the form of a loan

from a family member or grant from

a nonprofit organization. Freddie

Mac has also allowed in at least one

commitment that an additional 1

percent of the 5 percent down

payment could be in the form of sweat

equity. * Qualification ratios are typically

negotiated at 33 percent and 38 percent. * Borrower liquidity reserves are

often waived. * Borrowers without substantial

credit histories can generally establish

verifications through nontraditional

means, including utility companies

or previous landlords. * New homeowner counseling is often

encouraged or required during

pre-and post-closing. * Gifts from family members can be used to pay closing costs.


Interestingly, even within these similarities there are differences. For instance, both Fannie Mae and Freddie Mac have invested in low-income rental-housing tax credits. Freddie Mac's investment began later than Fannie Mae's but there are differences beyond just timing. One hundred percent of Freddie Mac's tax credit investments have been in funds where they are one of several investors and the fund always involves multiple properties. By comparison, approximately 40 percent of Fannie Mae's tax credit investments have involved single assets, where Fannie Mae was the sole limited partner. These differences may be explained, in part, to timing. Fannie Mae's Levine explains, "When we made our initial tax-credit commitments, the tax-credit marketplace wasn't as developed as it is today. As a result, the investments that were available early on were nearly all single asset and sole limited partnerships." However, each organization does have a policy prohibiting its involvement in debt purchases when it is also an equity investor. Curiously, there has been at least one transaction where Freddie Mac and Fannie Mae were limited partners in the same transaction.

Other differences include Fannie Mae's significant efforts in purchasing and providing credit enhancement for mortgage revenue bonds, an area with which Freddie Mac has yet to become involved. Fannie Mae has assembled a home office and regional staff in the affordable housing area of approximately 40 people. Freddie Mac currently has seven staff members devoted to these efforts, all in the corporate headquarters. "We have made the conscious decision to process and purchase affordable housing products through our existing business structures and systems," says Riedy of Freddie Mac. "We are currently training our existing regional staff, and feel confident we can accomplish our objectives in this manner."

Helping the locals

This article has devoted only limited attention to transaction volumes. This was intended for a number of reasons. First, as indicated earlier, there are timing issues that would skew calendar-year and total-production comparisons. Second, the strategies used by the two organzations make direct comparisons difficult.

The primary focus of this article has been to show similar and different approaches the two secondary market agencies are taking in affordable housing. In terms of similarities, there are two statements with which both organizations will agree. First, there is so much that remains to be done in the affordable housing area, Fannie Mae and Freddie Mac need not compete for market share in this business. Second, to be successful, national affordable housing programs must be flexible, tap the expertise of local programs, and avoid forcing successful local initiatives (square pegs) into tightly structured national programs (round holes). [Chart 1 Omitted]

Tom Dalton is managing director of T.R. Dalton and Associates, Reston, Virginia. He has 20 years experience in the mortgage industry, including more than six years with Freddie Mac in home and multifamily programs.
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Title Annotation:Federal Home Loan Mortgage Corp. begins purchasing mortgages under local housing programs
Author:Dalton, Tom R.
Publication:Mortgage Banking
Date:Aug 1, 1991
Previous Article:Adjusting to the perils of ARMS.
Next Article:Recovering damages.

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