In 2000, HUD Secretary Cuomo proposed revised GSE affordable housing goals for the years 2001-2003. For the first time, in a bipartisan led effort, the Republican-controlled Congress and Clinton White House approved the inclusion of subprime mortgages to count towards Fannie and Freddie affordable housing goals. Franklin Raines, CEO of Fannie, was dubious about including subprime mortgage purchases as performance measures and lobbied for their exclusion from mortgage markets, warning that “we have not been a major presence in the subprime market,” but “you can bet that under these goals, we will be.”
Fair housing advocates, during the public comment period, agued that the absence of reliable and publicly accessible data made it virtually impossible to determine which subprime mortgages had predatory features. Secretary Cuomo rejected the call for additional disclosures or regulatory oversight of subprime lending. In the final rule HUD replied that Fannie and Freddie “should led the industry in ensuring access to mortgage credit is made available and there is “ample room for further enhancement” of Fannie and Freddie in the A-minus market.” HUD final rule requested only such additional data as is necessary, in consultation with Fannie and Freddie, “as practicable” to “develop reasonable data reporting requirements that will not present an undue additional burden.”
Fannie and Freddie launched several “affordable” and “innovative” mortgage products to reach their regulatory affordable mortgage purchasing mandates. Fannie Mae introduced the “Flex 97” mortgage product. Freddie’s “Alt 97” mortgage products required smaller down payments, as small as 3 percent down. Freddie also introduced the Mortgage Solutions for Immigrant Families to promoted affordable housing solutions and home ownership opportunities for immigrant borrowers by eliminating special requirements and “simplifying underwriting guidelines for permanent and nonpermanent resident aliens.”
Fannie (Desktop Underwriter) and Freddie (Loan Prospector) increased their purchasing activity in underserved markets by pioneering the use of automated underwriting (AU systems). Research on Fannie and Freddie AU systems indicated that the goals were to make the underwriting process “blind to an applicants’ race and ethnicity,” providing a level playing field by “promoting fair and consistent mortgage lending decisions” and a system that “provided better accuracy than manual underwriting” which benefited underserved populations.”
Fannie and Freddie new mortgage products help blur the distinctions between prime and non-prime mortgage products. Historically, mortgages had been grouped into two primary categories: prime (“A” or “conforming” quality mortgages) and non-prime (anything less than A quality). With guidance and encouragement from the White House and both political parties, Fannie and Freddie changed their business model from insuring and securitizing conventional mortgages (i.e. those conforming to traditional underwriting standards) to building highly leveraged portfolios of securities backed by riskier Alt-A mortgage products.
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