Fannie Mae and Freddie Mac, the two biggest providers of money for residential loans, lag in their efforts to make housing more affordable to low-income home buyers, said Alphonso R. Jackson, Secretary of the U.S. Department of Housing and Urban Development.
"Fannie Mae and Freddie Mac are doing a good job," Jackson told a Mortgage Bankers Association conference in San Francisco last week. "The question, though, is whether it's good enough."
HUD, which oversees Fannie Mae and Freddie Mac, has proposed a rule to require the companies to direct 57 percent of their mortgage financing by 2008 toward homes for people with incomes no greater than the median of their areas. The current level is 50 percent.
Fannie Mae and Freddie Mac fell short of their federal mission in 44 states to help low-income home buyers, HUD said in July. John Weicher, an assistant secretary at HUD, said last month the government-sponsored companies would have to adjust their underwriting requirements to meet the goals.
"On average, the GSEs don't do as well as other lenders in the private market," Jackson said.
Fannie Mae and Freddie Mac don't originate home loans. Instead, they buy mortgages, giving lenders more money to make additional mortgages.
Freddie Mac Chief Executive Officer Richard F. Syron said the company is now more "flexible" with customers. It launched "Project Greenlight," a program which allows for mortgages with lower credit scores and includes affordable housing products in its automated underwriting service.
The companies have claimed HUD, in making the new targets, overestimated the number of mortgages for low-income homebuyers that would be available for purchase. Syron warned of damage to communities if in their "zeal" to help homeowners lenders extend too many loans that cannot be repaid.
Congress created Fannie Mae and Freddie Mac to make funds more widely available for mortgage loans and increase the affordability of homeownership. The companies raise money from investors by selling their own debt, and use proceeds to fund their purchases of mortgages from lenders. They also guarantee credit on mortgage-backed securities for sale to investors, including themselves.
Fannie Mae and Freddie Mac hold or guarantee almost half of the $7.6 trillion U.S. mortgage market. Their charters exempt them from state and local corporate income taxes and help lower their borrowing costs by authorizing the U.S. Treasury to buy $2.25 billion in securities from both companies in the event of financial problems.
Both companies must increase their roles while faced with the requirements by their federal regulator to hold 30 percent more capital in reserve than their mandated minimums. Fannie Mae agreed to build the surplus after its regulator said it found the company improperly used "cookie jar" reserves, wrongly accounted for hedging transactions and once deferred expenses so executives could obtain their maximum possible bonuses.