Fannie Mae Moves to Loosen Home Loan Credit Rules

The nation’s largest provider of mortgage funds, moving to increase homeownership among minorities and low-income citizens, unveiled a program Thursday to loosen lending standards for people with “slightly impaired” credit.

The Federal National Mortgage Assn. said it will encourage banks and other financial institutions to accept borrowers with blemished credit who may not otherwise qualify for conventional loans.

The program will begin on a pilot basis in 15 states, including California, and the District of Columbia. It is expected to expand nationwide early next year.

It is designed to provide homeownership opportunities for “many borrowers whose credit is just a notch below” qualifying for a loan, said Franklin Raines, Fannie Mae’s chairman and chief executive.

Currently, the consumers are forced to turn to so-called sub-prime lenders who charge higher rates, he said.

Under the new Fannie Mae program, borrowers will pay interest rates one-half to 2 percentage points higher than those consumers who have better credit histories, sufficient down payments or savings. The loans can be used to buy or refinance a home.

If the borrowers make payments on time for two years, the interest rates will be reduced by 1 percentage point. For example, a consumer who is granted a 30-year, fixed-rate $100,000 mortgage at 9.5% interest initially would pay $841 a month. After two years of timely payments, the interest rate would be reduced to 8.5%, cutting the monthly bill to $769.

In Southern California, Newport Beach-based Downey Savings and Loan and Santa Ana-based Mission Hills Mortgage Corp. are participating in the pilot program.

The market for these loans is significant, said Frank Demarais, Fannie Mae’s vice president of product development. He estimated up to half of the consumers in the $150-billion sub-prime market, who borrow from finance companies at higher interest rates because of less-than-stellar credit ratings, would meet lending requirements in the new program.

But lenders who will offer the mortgages were uncertain how much business would be generated through the loans.

“It’s a little early to tell what the potential is,” said Kevin Hughes, Downey’s director of secondary marketing. “I don’t believe this will be, from a volume perspective, our biggest producer. The standard 15- and 30-year conventional loans sold to Fannie Mae will be the larger percentage of loans.

“But this will be a niche program that otherwise would not be [salable] to Fannie Mae,” he said.

Although it doesn’t lend money to consumers, Fannie Mae helps set lending guidelines. Lenders who sell mortgages to the federal agency can realize immediate profits, lowering their risks and freeing up funds for more home loans.

Eric Belsky, director of the Joint Center for Housing Studies at Harvard University, said that lenders are just realizing the numbers of people who don’t qualify for standard mortgages.

Borrowers who have run into credit trouble from a “one-time event” are most likely to benefit from the new program, Belsky said.

More flexible loan standards, including lower down-payment requirements, have helped boost homeownership. Nationwide, more than two out of three citizens own homes, an all-time high.

Homeownership by minorities has increased faster in the 1990s than during any decade since the 1940s, with nearly 47% of African Americans and more than 46% of Latinos owning homes, Belsky said.

But the ownership gap between whites and minorities--during a prosperous time of high employment and low interest rates--has narrowed only slightly since 1993. “There [are] still enormous disparities that cannot be accounted for with differences in wealth and income,” Belsky said.

Consumers seeking more information on the program can call (800) 732-6643 between 6 a.m. and 2 p.m. PST.

The announcement came only weeks after the federal government unveiled one of the most ambitious programs ever to give more low- and moderate-income families an opportunity to buy homes.

Under that program, Fannie Mae and the Federal Home Loan Mortgage Corp., also known as Freddie Mac, agreed to pour $488 billion more into buying up mortgages for home purchases and loans for apartment construction.

More than $34 billion of the additional funds is earmarked for Southern California, including $9 billion in Orange County.

Fannie Mae, which has been under increased pressure from Housing and Urban Development chief Andrew Cuomo to step up its lending to lower-income consumers, buys mortgages of up to $240,000 from traditional lenders.