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Fannie Mae rethinks rules critics labeled as discriminatory

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Bloomberg News / April 24, 2008

WASHINGTON - Fannie Mae, the largest US mortgage-finance company, said it may retool tougher lending standards that it just imposed after housing advocates called the new rules discriminatory to women and minorities.

Fannie Mae and competitor Freddie Mac began introducing or raising fees late last year on mortgages they buy from banks because of rising loan defaults and a slump in home sales and prices. More than 80 housing advocates, mostly small community groups, sent letters to the companies' chief executives yesterday asking them to change the new pricing structures, which they said "is tantamount to both ethnic and gender discrimination."

"We have met extensively with advocates, listened to their concerns, and are considering making changes to our policies" regarding declining markets, Brian Faith, a spokesman for Washington-based Fannie Mae, said yesterday.

The new policies included higher down payment requirements and mortgage fees for loans to borrowers with low credit scores or for people living in certain ZIP codes where home prices have dropped. The housing advocates say the changes are akin to redlining, the illegal practice of banks denying loans and other services to certain areas.

"This astonishing policy shift will result in less private capital available in low wealth and minority communities," read the letter, released yesterday by the Consumer Mortgage Coalition. The group represents banks, lenders, and insurance companies that do business with or compete against Fannie Mae and Freddie Mac.

The group's biggest objection is how Fannie Mae defines a "declining market" based on ZIP codes instead of broader metropolitan areas like Freddie Mac does.

Most borrowers tend to move to a particular city for work or family, said Rob Breymaier, executive director of the Oak Park Regional Housing Center in suburban Chicago, which provides housing assistance to low-income borrowers. "But people will choose to move to a different neighborhood because it's not subject to this policy," Breymaier said.

Fannie Mae and Freddie Mac, created by Congress to increase mortgage financing, don't lend directly to borrowers. They fulfill their mission by buying mortgages from lenders so banks have more cash to make new loans. The companies make money by holding mortgage assets and on guarantees of mortgage-backed securities they create out of loans from primary lenders.

Senate Banking chairman Christopher Dodd, a Connecticut Democrat, has said the new policies violate the public mission of Fannie Mae and Freddie Mac, which also includes boosting homeownership and contributing to more affordable housing.

"The high-priced pricing is going to trap African-Americans into higher cost loans than whites," said Stella Adams, who ran the North Carolina Fair Housing Center in Durham. "Or it will dry up access to credit for African-American communities, which is in direct conflict with their mission."

A December analysis of 2006 mortgage data by Federal Reserve Board economists found that black, Hispanic, and other minority borrowers tend to pay higher interest rates than whites.

Fannie Mae is requiring borrowers to add an additional 5 percent in cash to their down payment on loans that finance homes in declining markets. The down payment size would depend on a borrower's credit worthiness, among other factors. Buyers who would otherwise qualify for a zero-down loan would have to put down at least 5 percent under Fannie's new guidelines, which take effect June 1.

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