End Of Fannie Mae, Freddie Mac Will Affect Minorities

The Obama administration is proposing the gradual phasing out of federal mortgage giants, Fannie Mae and Freddie Mac. More than 90 percent of loans in the mortgage market currently flow through the two corporations. The proposals were detailed in a white paper released last week and coincided with a new study showing huge racial disparities in mortgage lending since 2004. To understand the implications for minority borrowers, host Michel Martin speaks with Barry Zigas, housing policy director of the Consumer Federation of America and William Michael Cunningham, of investment firm, Creative Investment Research.

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MICHEL MARTIN, Host:

I'm Michel Martin, and this is TELL ME MORE from NPR News.

Hip-hop pioneer Russell Simmons is on the program today. He's penned one bestseller and now he's got another book out. It's called "Super Rich," but it's actually about a lot more than money. And so is our conversation. That's coming up later in the program.

B: housing. Last week, the Obama White House unveiled its plans for overhauling the troubled mortgage industry. The White House is proposing the gradual phasing out of the federal mortgage giants, the Federal National Mortgage Association, or Fannie Mae, and the Federal Home Loan Mortgage Corporation, or Freddie Mac. More than 90 percent of all mortgages written in this country currently flow through Fannie and Freddie.

The proposals include raising fees for borrowers and requiring larger down payments for home loans. This could boost mortgage rates and make it harder for homebuyers to get those 30-year fixed rate mortgages. The Obama proposals coincided with the release of another study, showing that mortgage lending to African Americans and Latinos has plunged by more than 60 percent since 2004. That's compared with a drop of just 17 percent for non-Hispanic whites.

We wanted to talk more about the future of Fannie Mae and Freddie Mac and what it means to all borrowers and particularly minority borrowers and lenders, so we've called Barry Zigas. He's the director of housing policy with the Consumer Federation of America. That's a consumer organization. And he's also a former senior vice president at Fannie Mae, where he led the corporation's community lending initiatives.

I'm also joined by William Michael Cunningham, owner of Creative Investment Research Incorporated. He does research on minority banks and on socially responsible investing. Thank you both so much for joining us.

MARTIN: You're welcome.

MARTIN: Thank you.

MARTIN: So, Barry, I'm going to start with you. The White House is proposing different pathways for dealing with Fannie Mae, Freddie Mac. But all of them really lead to eliminating these agencies entirely. Why do they want to do that?

MARTIN: Well, there's two separate issues here. One is the specific companies, Fannie Mae and Freddie Mac, which ran into terrible financial trouble as a consequence of some investment decisions they made in the mid-2000s.

Both companies are now in conservatorship, which is a kind of a form of managed bankruptcy. And there seems to be wide agreement that whatever the new system is that's put in place, in the future, Fannie Mae and Freddie Mac, as they are constituted today, are going to have to be wound down. That's one question.

MARTIN: Wide agreement with whom?

MARTIN: Just generally around - among policymakers in Congress. Just as the specific companies they are today.

MARTIN: OK.

MARTIN: Now, the question that is not yet resolved and that the administration's paper tried to focus on is if not them, then what? And if not now, when? And the administration proposes a series of options that would range from federal support only for a limited category of mortgages through the Federal Housing Administration, the FHA, with everyone else, all other borrowers left to the mercies of the private market.

And then through two other options - to a form, a limited form of federal guarantee that would be paid for and explicit in contrast to the guarantees that were behind Fannie Mae and Freddie Mac, which were really implicit.

The problem of moving from one state to the other is very complex because there's over $5 trillion in mortgage securities that are backed by the two companies, almost a trillion dollars in their portfolios. Winding them down and moving to a new system is going to be very complex and difficult.

MARTIN: As we understand, this is not so much a proposal as more of a research paper that was open for public discussion. But does your group have an opinion about the way forward? And then, Mr. Cunningham, I'm going to ask you the same question.

MARTIN: Yeah, at CFA we think it's very important to continue the 70-plus-year tradition that we've had in the United States to provide a form of government support to ensure that consumers and homebuyers can get long-term fixed rate mortgages that they can freely prepay and that they have a wide choice of mortgages from a wide range of lenders, including small community banks and credit unions.

And we're less concerned with the specifics, you know, of is it Fannie Mae, Freddie Mac or something else. And we think the administration has appropriately in its paper targeted attention on those issues. But they have chosen, I think primarily for political reasons, not to choose an option.

MARTIN: Mr. Cunningham, what do you think? First of all, do you have an opinion about the analysis the White House put forward?

MARTIN: Absolutely. I think it was a very good analysis, very mature. Our issue with the report is not that it's inaccurate, it's that it does not encourage us to do anything really expansive or great. What - we think that home mortgage costs are going to increase in the country no matter what. They already have. They're going to for the next 10 years. They should.

We'd like to see Fannie and Freddie repurpose to focus on energy-efficient mortgages. Now, we know that energy costs are going to go up. So, there is a great opportunity to repurpose Freddie and Fannie, to make them the premier institutions in the world with respect to creating energy efficient home properties.

MARTIN: OK. That's one idea. So, let me just ask you, though, about the basic premise of the argument, which is that this country spends too much on housing. Do you agree?

MARTIN: I agree.

MARTIN: Do you both agree?

MARTIN: I think we have too much money being spent on housing for the wrong part of a population and we have far too little money being spent to meet the really important and desperate housing needs of low and moderate income people, of the homeless, single parent households, working people who need affordable rental housing and also opportunities to buy a home in which they can be secure.

The system today is completely rigged to provide most of the benefits to upper income people. And this - the proposals the administration has made to raise fees for both FHA and for the GSE's as they're currently (unintelligible).

MARTIN: Government enterprises.

MARTIN: Government Sponsored Enterprises.

MARTIN: OK.

MARTIN: Which we all call Fannie Mae and Freddie Mac, is...

MARTIN: Which is to say that they were sponsored and charted by the federal government - that they are private entities, they have shareholders.

MARTIN: That's correct.

MARTIN: And they operate on the stock exchange and so forth.

MARTIN: That's correct.

MARTIN: So, if you're just joining us, this is TELL ME MORE from NPR News. I'm talking today about the proposals from the White House issued late last week to help overhaul the mortgage industry, starting with the federal mortgage giants, Fannie Mae and Freddie Mac. I'm joined by Barry Zigas. He's a former vice president at Fannie Mae. Now, he's with the Consumer Federation of America. And William Michael Cunningham of Creative Investment Research Incorporated. That's the firm that's focused on minority and socially responsible investing.

So, I want to ask you both about this study by a firm called Compliance Tech, which advises financial institutions on fair lending practices. It analyzed the mortgage lending data over a five-year period and it found wide racial and ethnic disparities in how often financial institutions approved mortgage applications and made mortgage loans from 2004 to 2009.

I'll just give you a couple other points that African Americans and Latinos were able to borrow 62 percent less to buy refinanced homes in 2009 and in 2004. And mortgage dollars going to non-Latino white borrowers dropped by 17 percent. Asians have seen no real change in the amount in mortgages. And whites were twice as likely as blacks and Latinos to be approved for prime mortgages with the lowest interest rates. Is this a function of the economy, where these are just - happen to be the hardest hit by the recession. Is it a function of income or there something else, Mr. Cunningham?

MARTIN: No. There's something else going on here and always has. Minorities have always been targeted for the most restrictive lending types of products by the financial institutions over the course of the past 60, 70, 80, 90 years.

MARTIN: What's the way forward, then, given this information?

MARTIN: The way forward is to focus on marketplace ethics. The financial crisis isn't really a crisis of technology. It's a crisis of marketplace ethics. You had these guys who targeted minority communities because of their greed and they basically forced these illegal financial products onto a population that could least afford them.

MARTIN: Barry Zigas, what's your perspective on this?

MARTIN: Well, I agree with that. The history of this crisis really starts with the rise of subprime unregulated lenders who, as Bill says, had found a new market particularly among new African American and Hispanic homeowners, but also in low and moderate income communities among families that had equity in their homes but didn't have great credit and were not being marketed to by traditional institutions.

And they targeted these communities by offering them loans on terms that sounded too good to be true and turned out to be too good to be true. That lending is really what drove the subprime mortgage industry and has what led to the crisis today.

MARTIN: Well, conservatives would make the opposite point. They would argue that the pressure to lend to these previously underserved communities is what led to the crisis.

MARTIN: And they could not be more wrong. Starting back in the Clinton administration, the Federal Reserve in 1991 issued a report that definitively showed how minorities had been discriminated against for no other reason than their race in the access to mortgage credit. There's no doubt there's a gap that's driven by race.

MARTIN: Well, what's the way forward then, given this data?

MARTIN: The financial reform legislation that was adopted last year has established much clearer standards for mortgage lending, something the regulator should have done early in the 2000s and chose not to do.

Going forward, we need to preserve a system of federal support for long-term fixed rate mortgages so that aspiring home owners can get access to a home without fear of being kicked out of it because their lender raises their interest rate.

MARTIN: People who want to follow this debate going forward, what should they be looking to? What kinds of argument should they be paying attention to?

MARTIN: Here's what you need to do. You need to go on the Web and search for the Consumer Financial Protection Bureau. They have a new website where they could look at all of the rules that are being put into place that follow from the financial reform legislation to protect consumers and specifically minority consumers. So they need to watch that website.

MARTIN: But what about...

MARTIN: Number one...

MARTIN: Go ahead, Barry.

MARTIN: Number one, we should stop blaming the homeowners who fell victim to that. Number two, we should look to every policy proposal and ask, is it going to meet the following standards? Will it increase access to affordable long- term fixed-rate mortgage credit? And will it provide a means through which we can support the housing needs of extremely low and very low income people who do not have the income or means to participate in this part of the market, but still have terrible housing needs that have to be addressed?

MARTIN: For those who are not now homebuyers, but who would like to be in the future, how should they view these proposals?

MARTIN: I would view them with worry. The proposals the administration has made seem equally driven by a desire to build up more capital for Fannie Mae and Freddie Mac and the FHA. In other words, have more money in reserve against possible losses.

But also, as they put it, to bring the private market back into mortgage lending. In other words, to bribe big banks and hedge funds by making the cost of a mortgage through government supported entities so expensive that the private alternative looks attractive to consumers.

And that, that is profiting at the consumer's expense. And we have to be very careful that these proposals aren't done to establish arbitrary limits on down payments, arbitrary sizes of fees, you know, for the intention of trying to bring the people who wreck the economy with these terrible mortgages in the first place, you know, back to the table is the winners. Now that would be a terrible irony.

MARTIN: OK. Final thought, Mr. Cunningham?

MARTIN: Credit unions, credit unions. If I were looking to buy a house right now, if I were looking to finance a business right now, if I were looking to get any type of financial product whatsoever, I would go to the Web and look for the credit unions that are in my area. These are community owned financial institutions. They have a great reputation with respect to providing responsible financial services, especially to women and minorities.

MARTIN: OK. William Michael Cunningham is the owner and director of Creative Investment Research Incorporated. That's an investment firm working in the area of minority banking and socially responsible investing. And Barry Zigas is the director of housing policy for the Consumer Federation of America. And he's a former senior vice president at Fannie Mae, focused on community lending initiatives and they were both kind enough to join us here in our Washington, D.C. studios. Gentlemen, thank you both so much for joining us.

MARTIN: Thank you.

MARTIN: You're welcome, Michel.

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