Fannie Mae is looking to subprime mortgages to replace its dwindling conforming purchases and, in the process, lower the cost to subprime borrowers.
At the annual convention and expo of America's Community Bankers (ACB), Fannie chairman and chief executive Franklin D. Raines said the mortgage giant intends to purchase subprime loans in a more aggressive stance; the move will help more borrowers avoid higher-cost, abusive loans and generate more business for lenders, according to a transcript of his prepared statements.
"Fannie is moving ahead with a concerted effort to serve the subprime market," Raines said. "And helping our ACB partners compete and succeed in this market is a vital part of the strategy."
The executive highlighted the subprime segment's growth -- noting it has doubled over the past decade -- with nearly $323 billion in subprime home loans originated during 2003 and more expected this year as conforming production decreases industrywide.
Raines acknowledged subprime lending provides an important source of mortgage financing for borrowers with imperfect financial or credit histories, but when "done wrong, it is a huge rip-off that siphons wealth and hope from families who can least afford it."
Despite the success of the subprime sector, Raines said three major areas of concern arise in this market: "predatory lenders lurk" in this sector; a disproportionate number of minorities and lower-income families depend on these high-cost loans; and "too many of these high cost loans are going to people who could qualify for lower-cost prime rate loans. Or maybe these families have minor financial, credit or documentation issues that require only a minor surcharge to cover the additional cost of covering the risk."
Raines said the company estimates that nearly half of future first-time home buyers will be minorities and immigrants by the end of this decade. However, a "big issue facing the housing finance industry, and ... stands in the way of major progress ... is how we serve families who want to own homes but have blemished or atypical credit histories," Raines added.
He reiterated comments recently made by the Federal Reserve Board's governor that borrowers with FICO scores below 620 are viewed as higher risk and generally ineligible for prime loans, yet "about half of subprime mortgage borrowers have FICO scores above this threshold indicating that a good credit history alone does not guarantee prime status."
The data suggests millions could qualify for lower-cost loans, "in fact, we estimate that about half of subprime borrowers have only slightly blemished credit and are just a notch away from qualifying for Fannie Mae's prime conventional financing," Raines said.
"To serve these families we must look for new ways to account for atypical patterns and behaviors. We're not talking about lower lending standards. We're talking about using technology to deploy smarter lending standards ... to better identify and create mortgage options ... and to allow lenders to originate efficiently and have an underwriting decision they can stand behind," he added.
The CEO offered a three-part approach Fannie would take to standardize the subprime market, or help ensure consumers have access to affordable mortgage financing.
The first part consisted of promoting consumer awareness of their mortgage rights and responsibilities to provide borrowers with adequate information that will enable them to make good mortgage decisions.
Secondly, it will help trustworthy lenders serve underserved areas, and help them reach and serve underserved families. "We need to develop the marketing strategies that give the underserved consumer the confidence that their mainstream lender will bend over backwards to say, 'Yes.' And we need to provide mainstream lenders with the products, processes, and prices that enable them to say 'Yes' more often to nontraditional borrowers."
As for the third part of its strategy, Fannie would need to continue to reexamine its lending standards and practices to serve the growing ranks of atypical home buyers.
Unlike Fannie, which purchases subprime loans on a loan-by-loan basis or in securities, Freddie Mac spokesman Douglas Robinson said the Virginia-based secondary lender is "currently investing in subprime loans through the purchase of mortgage securities."
"However, we are continuing to work with our lenders to find ways to make more approved borrowers who are really not subprime borrowers in the first place," Robinson continued. "We hope that lenders direct them to a prime product because we have flexible prime products that many borrowers may not be familiar with."