Community bankers and Fannie Mae—ready to meet the nation’s housing challenges
by Frank Raines
Many in the housing and mortgage finance industry might be expecting to take a well-deserved breather in 2003 after meeting the challenge of the latest refinance wave, spurred by the lowest mortgage rates in nearly four decades. Millions of Americans have taken advantage of these record low interest rates to either purchase or refinance a home, and the nation’s community bankers have been there to help them make use of the greatest wealth-building tool available to most people, boosting the economy in the process.
Times have been good, and we’ve all benefited. But as this refinancing wave shows signs of ending, it’s important to not lose sight of the even greater challenges that lie ahead, challenges that go beyond the day-to-day requirements of meeting the immediate business demands of community bankers’ traditional customers. The good news is, we’re poised for even better times ahead, as long as we position ourselves to meet the three challenges that will require all of us to redouble our commitment to keeping America’s housing finance system the best in the world.
- First, we all will need to work to meet the growing demand for mortgage financing.
- Second, we’ll need to work together as partners to deliver mortgage financing through more lenders to more people and places, especially the fast-growing emerging markets.
- Third, we’ll need to keep the primary and secondary mortgage market partnership strong, cooperative and able to meet the demands on the housing finance system under any economic circumstances.
We’ll all have to work together to meet these three challenges. First, this could be the greatest decade for homeownership in American history. Mortgage originations in 2002 were about $2.5 trillion. And spillover from last year could launch 2003 into another $2 trillion year. That’s on top of record years in 1998 and 2001.
But because of the drastic decline in the values of technology stocks since the beginning of this decade, that kind of success makes people jittery. After the tech bust and Enron collapse, no one wants to be optimistic. So we’ve heard lots of speculation that there is a “housing bubble” lurking out there that will bring a huge decline in housing values. That’s not what is happening to housing.
It is true that high-end homes, especially in Internet boomtowns, might be staying on the market longer, or coming down off inflated prices. And it’s true that mortgage foreclosures and delinquencies have risen somewhat across the industry, but that’s mostly for Jumbo, FHA and subprime loans. For the average American homeowner, and the lenders who serve them, home price appreciation has grown modestly at historical rates, and credit losses remain near record lows.
Indeed, by all signs, housing remains very healthy. Existing home sales in November were the sixth largest on record. New home sales remained strong in 2002, and housing starts remain healthy. Mortgage refinancing continues at a record pace, and with home prices still strong in most areas, many homeowners continue to cash out equity, boosting the economy. Yes, home prices have leveled off from levels we knew were unsustainable, and have now returned to normal. But home prices still grew by more than six percent in 2002.
Fannie Mae expects home price appreciation to remain in the 4.5 percent range this year, its usual rate. And we think mortgage interest rates will reach around 7 percent in 2003, still low by historical standards. Most importantly, over the coming decade, the expected growth in population and immigration will create 13 million to 15 million new households.
So instead of a housing bubble, the home financing industry faces the question of how to do more, especially for the fast-growing emerging market for minority and new American families. This growth will have serious implications. Environmental issues and growth restrictions probably will keep housing inventories tight in most communities. That pressure between supply and demand probably will keep home values growing at a strong rate. While that’s good for current homeowners and the economy, it makes it harder for families who don’t yet have a home.
Closing the Housing Gap
According to a recent paper by Todd Buchholz for the Homeownership Alliance (of which both Fannie Mae and ICBA are charter members), the growth and economic success of minority and immigrant families has injected new vigor into the housing market in recent years. While the minority homeownership rate is around 49 percent, compared to 74.6 percent for white families, Buchholz notes that it is minority families that have launched the housing sector to new heights.
White Americans purchased 9 percent more homes in 2000 than in 1994, while Hispanics bought 39 percent more, and African Americans bought 24 percent more. And many foreign-born residents who entered the country during the past 20 years are just now reaching the point where they have saved enough money to consider buying a home.
This dynamic creates a serious test for housing policies in Washington. If Washington did anything that would stifle our housing finance system, this country could wind up in the middle of a housing crisis—and not just for the low-income renter, but for middle America as well.
This has significant implications for those of us in the housing finance industry. With those 13 million to 15 million new households, growing home values, and the growing use of home equity wealth through refinancing, it appears that demand for mortgage debt overall is going to increase by 8 to 10 percent per year, and more than double in this decade, growing from $5 trillion in 2000 to $11 trillion to $14 trillion in 2010.
Not many industries in America can project 8 to 10 percent growth per year. But strong growth always presents a challenge. For community bankers in the primary market, the challenge will be to keep up with the increasing demand for a faster, better, cheaper, more consumer-friendly mortgage process.
For those in the secondary market, the challenge will be to keep up with the increasing demand by lenders for low-cost mortgage funds. Fannie Mae also believes our role is to help our lender customers serve more consumers in more ways, and do good, growing and profitable mortgage business. That leads to the housing finance system’s second challenge. Fannie Mae and its lender partners must continue to work together to meet the mortgage needs of more people, especially the fast-growing emerging markets that will dominate our housing system in the current decade.
Fannie Mae has a mandate to lead the market in serving lower-income families and neighborhoods. We also have a voluntary goal to lead the market in serving minority families. We’ve put $2 trillion on the table to expand housing for all underserved families—immigrants, single-parent households, families that work hard, but maybe have a minor credit blip or two.
We’ve also committed $700 billion to meet President Bush’s challenge to the private sector to help achieve “broader homeownership, especially among minorities,” and close the 20-point gap between minority homeowners and the nation as a whole.
However, Fannie Mae can only buy what our customers choose to sell us, so to meet these goals, we need our lender partners more than ever. Fannie Mae knows that the only way we can be a leader is when our customers are leaders. We appreciate community bankers’ leadership in expanding lending to underserved families. We appreciate when our customers reach out to emerging markets, serve their needs and originate more mortgages with minority and underserved families. This is not a market we can cede to subprime and government lending. Community banks already know many of these neighborhoods and markets, and are in an ideal position to take advantage of these new opportunities.
Finding New Solutions
Fannie Mae is going to do all it can to help community bankers. We’re going to continue to provide creative, customized mortgage products that help you reach and serve these markets. We even provide training to help our lender partners better understand how to reach and relate to these new minority and immigrant borrowers. Lenders that are proficient at finding and servicing these new borrowers will have a competitive advantage in their markets.
While Fannie Mae serves individual banks, we also serve the entire banking system. That leads to the third challenge we’ll face in the coming decade—tinkering that could inadvertently undermine the health of the financial system as a whole. Fannie Mae’s charter, our business model, our risk management, our portfolio, our capital model and our corporate governance are all geared to ensuring one thing: that no matter what the economic conditions, we’ll be there to keep capital flowing to the housing finance system, so community banks and their customers have unrestricted access to the low-cost funding needed to make the American dream of homeownership a reality, and continue to fuel the national economy.
Fannie Mae’s federal charter requires us to serve all markets, at all times, under all economic conditions, even when and where conditions are not optimal for investing in mortgages. That means we’ll be here to invest in mortgages even when market conditions lead others to divest their mortgage assets.
Fannie Mae is able to do so because of our simple business model—we operate two lines of business, a credit risk management business and an interest rate risk management business. We manage only one investment—U.S. residential mortgages, we handle that investment in huge volumes, and we can fund it by raising capital across the yield curve, and around the world.
Our capital model also has two parts, a minimum capital requirement and a risk-based capital requirement with an economic stress test. These requirements mean we have to hold capital to withstand a decade-long economic crisis, with huge interest rate swings. We also have to be able to withstand a total collapse of company operations and management, with no new business coming in. These tests are designed to ensure that Fannie Mae always will be there to support the nation’s housing finance system. And as you know, our financial regulator announced at the end of 2002 that we passed this stress test with flying colors.
Finally, the third factor that helps Fannie Mae serve all markets, at all times, under all conditions, is our corporate governance model. We’re out in the capital markets every day, around the world, selling our Benchmark debt securities to investors to raise capital to fund mortgages. To attract this capital, Fannie Mae has to tell investors—whether they’re in Asia, Europe, the Middle East or the United States—why we’re an investment that should be included in their portfolio strategy.
That means we disclose a wide range of information, placing Fannie Mae on the cutting edge of voluntary disclosures, making us one of the most transparent companies in the world. That’s our corporate governance model—to provide maximum disclosures to achieve maximum investor confidence. This model, along with our business model and capital model, are all geared to allow Fannie Mae to meet our unique requirement in the financial system—to supply mortgage funds to all markets, at all times, under all economic conditions.
Fannie Mae wants to help community bankers meet the needs of this next generation of potential homebuyers. Since announcing the ICBA–Fannie Mae Partnership a year ago, scores of ICBA member banks have taken advantage of the extensive array of secondary mortgage product, pricing and education benefits under the agreement to enhance their ability to compete in their markets.
We encourage those ICBA-member bankers who haven’t yet decided to work with us to draw from the experiences of your fellow ICBA members to determine if our streamlined lender approval, price breaks on setting up and using Fannie Mae’s Desktop Underwriter mortgage processing software, and one-on-one consultation to help individual banks better manage their loan portfolios, can help make your mortgage and secondary market lending operations more efficient and more profitable.
Fannie Mae also urges you to take advantage of training offered under the partnership, from conference call discussions to discounted industry- recognized courses through Fannie Mae’s Housing Finance Institute, which provides instruction on using the secondary market. The institute offers diversity courses to help lenders learn how to reach and communicate with minority and immigrant borrowers.
Community bankers know better than most the positive impact homeownership has in small towns, big cities and suburban neighborhoods. You’ve funded the dreams of countless Americans by putting deposits to work locally, and by embracing the best products and technologies that allow you to continue to provide the best service to your customers and communities. Community banks are key components of a strong, diversified financial system, and with your continued partnership and support, we all can help ensure that we continue to support people and communities as they continue to change and grow, reflecting the best of America’s ideals. Working together, we’re looking forward to doing even more.
Frank Raines is chairman and CEO of Fannie Mae, a stockholder company operating under a federal charter. It is the nation’s largest provider of home mortgages, operating exclusively as a buyer and seller of mortgages in the secondary market.