In a move that signals an increase in the flow of mortgage money into inner cities, the Federal National Mortgage Assn. announced that it is buying $1.3 billion in home mortgages made to low-to-moderate income borrowers in California.
The mortgages were made by American Savings Bank in Irvine, California’s leading low-income home lender. Fannie Mae, as the government-chartered company is known, will buy the mortgages and repackage most of them as securities for sale to investors.
Fannie Mae’s purchase is its largest ever of low-income mortgage loans and addresses a complaint of many mortgage lenders that Fannie Mae has been unreceptive to buying such mortgages because they did not meet its strict underwriting standards.
That lack of a secondary market meant lenders such as American Savings did not have as much cash available to them to make new loans. But the deal announced Wednesday is a sign that the government is placing new emphasis on getting more mortgage money to inner cities, Fannie Mae officials said.
“This deal represents a big step in working with depository institutions who have portfolios targeted to low-income and minority borrowers,” said Donna Callejon, a Fannie Mae senior vice president.
By buying mortgage loans, then selling them as securities to private investors, Fannie Mae creates liquidity for thrifts, banks and mortgage bankers that originate home loans.
With its strict loan qualification standards, Fannie Mae in effect shut out many low-income and minority borrowers, critics complained. But during the last year, new federal legislation and pressure from the Bush and Clinton administrations forced Fannie Mae to adopt more flexible standards in the loans it buys.
The Federal Housing Enterprises Financial Safety and Soundness Act of 1992 mandated that Fannie Mae buy at least 30% of its loans made to central city areas. The new rules became law Jan. 1 but will be implemented over several years.
To meet those goals, Fannie Mae is accepting non-traditional credit references for borrowers from American Savings, including rental receipts and utility payments, said Gail Vernon, vice president of marketing for Fannie Mae’s Western regional office in Pasadena.
Fannie Mae also accepted loans to borrowers who make higher than usual monthly mortgage payments as a percentage of income. Smaller cash reserves among borrowers were also accepted, she said.
American Savings Chairman Mario Antoci said the purchase of his thrift’s loans will send a strong message to lenders about low-income mortgages.
“There is pressure on Fannie Mae to do more lending in inner cities,” Antoci said. “They have been mandated to reach more goals by Congress, but they have been having a tough time meeting it. Normal standards, even flexible standards, weren’t flexible enough. This is allowing them to get more flexible.”
American Savings makes about 32% of its mortgages to inner-city and minority applicants in California.