Fannie Mae Moves Against Predatory Loans
The nation’s largest home loan financier announced guidelines Tuesday to fight predatory practices in the exploding mortgage market for buyers with low incomes and poor credit.
In a letter to mortgage lenders, Fannie Mae--a public company chartered by the government that buys one of four home loans made by banks--said it would refuse to purchase most mortgages with upfront fees of more than 5% of the loan amount.
The agency said it will also deny most loans with prepayment penalties and with credit life insurance policies.
Under the guidelines, it will also reject loans from lenders who fail to provide information on borrowers’ repayment performance to credit reporting agencies.
“As we begin to lend to more borrowers with lower incomes and blemished credit records, we want to make sure those borrowers understand that Fannie Mae and the lenders we work with will not practice predatory lending in any circumstance,” Fannie Mae spokeswoman Janice Daue said.
Freddie Mac, a company similar to Fannie Mae that also purchases home loans, announced similar guidelines last month. The company, however, didn’t place a limit on loan fees charged by sub-prime lenders. These lenders typically make loans that carry higher fees and interest rates to home buyers with low incomes and poor credit.
Sub-prime interest rates average 10% to 12% and carry upfront fees as high as 10% of the loan amount. In contrast, conventional borrowers with strong credit might pay 1% or less in fees and get interest rates of about 8%.
Predatory lending limits devised by Fannie Mae and Freddie Mac could have a marked effect on the nation’s mortgage market. Lenders typically consider policies set by these secondary mortgage market investors to be the industry standard.
Fannie Mae and Freddie Mac have come under fire recently for their decision to invest in the lucrative sub-prime market. Lawmakers worry that the financiers will inject funds into a market already plagued by aggressive sales tactics and hidden fees.
The increasing number of Americans with poor credit is in part fueling the expansion of the $150-billion sub-prime market. Lenders are scrambling to get into this market, which offers higher profit margins than the conventional lending arena.
Consumer groups recently called on Freddie Mac to explain why it had invested in high-interest home loans. According to spokesman Brad German, Freddie Mac bought the loans as part of an effort to understand how the sub-prime market worked.
Housing and Urban Development Secretary Andrew Cuomo is scheduled today to call for legislation that would make it illegal for Fannie Mae and Freddie Mac to purchase loans with unreasonable fees and prepayment penalties.
Cuomo also will release a HUD report that documents the growing abuses in sub-prime lending, especially in low-income neighborhoods and among African Americans, at the first meeting of HUD’s Task Force on Predatory Lending, said David Egner, a HUD spokesman.
“The federal government has an obligation to protect consumers against predatory lending practices,” Egner said. “Federal action is needed to ensure these protections are made permanent and have the force of law and aren’t voluntary actions by others that could be revoked at any time.”
HUD joins a growing number of legislators, regulators and consumer groups calling for new laws to protect borrowers from predatory lending practices that often lead to unaffordable mortgage payments or foreclosures. Several states are considering new laws to cap loan fees or mandate consumer education.
