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Letters to Regulators

Housing Goals for Fannie Mae and Freddie Mac

July 16, 2004

Regulations Division
Office of General Counsel
Room 10276
Department of Housing and Urban Development
451 Seventh Street, SW
Washington, DC 20410

Re: Docket No. FR-47-P-01; Proposed Housing Goals for the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) for the Years 2005-2008 and Amendments to HUD's Regulation of Fannie Mae and Freddie Mac

Dear Sir or Madame:

The Independent Community Bankers of America1 welcomes the opportunity to comment on the new housing goals that the Department of Housing and Urban Development (HUD) has proposed for Fannie Mae and Freddie Mac.

The Importance of Homeownership and Housing Goals

Many community banks rely on Fannie Mae and Freddie Mac, directly or indirectly, to help them provide residential mortgages to their customers. ICBA has entered a partnership with Fannie Mae and an alliance with Freddie Mac to provide better direct access to the secondary market for our community bank members. Through such relationships, community banks are better able to promote affordable housing opportunities to their customers.

We recognize that, overall, homeownership stands at record levels in the United States, yet many Americans, particularly those in minority groups, have not realized the American dream of homeownership. As a charter member of the Homeownership Alliance, ICBA strongly supports closing the gap between minority and non-minority homeownership levels. This is particularly important due to the recent influx of immigrants who will be seeking homeownership in the coming years. Community banks in all parts of the country recognize the importance to their customers and communities of providing mortgages for affordable housing.

Both Fannie Mae and Freddie Mac have played a critical role in the development of the secondary mortgage market and they have responded to the ever changing mortgage financing needs of America's homeowners by developing loan products and technologies that have vastly changed the mortgage industry. Both Fannie Mae and Freddie Mac enjoy special benefits due to their status as government sponsored enterprises (GSEs). But with this special status comes a responsibility to promote low- and moderate-income housing, special affordable housing, and housing in central cities, rural areas and other underserved areas. It is appropriate for the two GSEs to have goals set to ensure that they meet this responsibility.

Summary of ICBA Position

While ICBA strongly supports the intent of the goals to ensure that Fannie Mae and Freddie Mac lead the market in providing mortgage financing opportunities for affordable housing, we are concerned that the goals that HUD proposes too narrowly allocate credit to certain market segments in a manner that could significantly damage the mortgage industry and ripple through the economy.

ICBA is greatly concerned that the new goals and sub goals, as proposed by HUD, will interrupt the flow of mortgage funds that Congress charged the two GSEs with promoting. During the recent downward cycle in interest rates when homeowners flocked — in some cases multiple times — to refinance their mortgages to enjoy lower interest payments and other consumers sought loans for new homes, Fannie Mae and Freddie Mac played a vital role in keeping the market liquid so that lenders in all parts of the country could meet their customers' needs for mortgages. No one debates that the housing sector was a rare source of strength in the recent economic downturn, and the liquidity of the market played a key role in that strength.

HUD's Proposal

In accordance with Federal Housing Enterprises Financial Safety and Soundness Act of 1992 (FHEFSSA), HUD proposes new goals for the years 2005-2008 to govern the purchase by Fannie Mae and Freddie Mac of mortgages financing low- and moderate-income housing, special affordable housing and housing in central cities, rural areas and other underserved areas. HUD proposes three new housing goals and new sub goals for the GSEs' acquisitions of home purchase loans that qualify for each of the housing goals. The sub goals are calculated as percentages of the GSEs' total acquisitions of home purchase mortgages for single-family, owner-occupied properties located in metropolitan areas meeting each of the three housing goals.

Under FHEFSSA, HUD is required to establish each housing goal after consideration of certain factors that are relevant to the particular housing goal including (a) national housing needs; (b) economic, housing and demographic conditions; (c) the performance and efforts of the GSEs toward achieving the housing goal in previous years; (d) the size of the market for mortgages targeted by the housing goal relative to the overall conventional mortgage market; (e) the ability of the GSEs to lead the industry in making credit available for mortgages targeted by the housing goals and (f) the need to maintain the sound financial condition of the GSEs.

The Proposed Goals Must Reflect the Realities of the Market

HUD acknowledges that it has set the new goals at a significantly higher level than its goals for 2001-2004 and has proposed aggressive goals for the next five years. ICBA understands that the two GSEs and other industry representatives are concerned that the goals are too aggressive and may not reasonably be attainable and that, in efforts to attain the goals, Fannie Mae and Freddie Mac may be forced to use their clout to the detriment of private financial institutions and encourage the extension of credit to low-income consumers who truly are not in a position to repay their mortgages and will ultimately lose their homes.

If the goals are too aggressive and, in their quest for mortgages to the lower income segment, the GSEs make credit less available or relatively more expensive for other income segments, HUD likely will face a barrage of angry consumers who currently and in the recent past enjoyed ample access to reasonably priced mortgages, but who will in the next five years face much more restricted access or relatively higher mortgage costs as Fannie Mae and Freddie Mac chase mortgages made to lower income homeowners in order to meet their goals.

ICBA is not in a position to truly know whether Fannie Mae and Freddie Mac will be able to safely and soundly meet the proposed goals without damaging the mortgage market, private financial institutions and, most importantly, consumers. ICBA urges HUD to work closely with both Fannie Mae and Freddie Mac to ensure that the proposed goals are challenging, but reflect the realities of the market.

There are many ways that Fannie Mae and Freddie Mac can "lead the market." Through the proposed goals, HUD has focused on methods to quantitatively measure leadership. But in our view the two GSEs play an important leadership role in the development of products and technologies that the private sector may not be willing or able to do as well. By doing so, the GSEs expanded homeownership opportunities and lowered the cost of homeownership to the benefit of all. One example of a market segment that truly needs their leadership and expertise is the manufactured housing sector as discussed further below.

The proposed goals are by necessity highly dependent on economic forecasts. We have just experienced a unique environment where mortgage rates fell to their lowest levels in decades, an event that few if any forecasters could have predicted. The result was an unexpected massive wave of refinancing concurrent with a strong demand for purchase loans. We are likely to see other periods in the next five years that will result in deviations from HUD's forecasts for market potential. It is important for HUD to provide the ability to readjust the economic forecasts and the numerical goals for changes or errors in the economic forecasts and for the changing housing environment. Fannie Mae and Freddie Mac can adjust their performance to a great extent but they do not control a market driven by consumer demands.

Also, we recognize the importance of Fannie Mae and Freddie Mac providing accurate data for the measurement of their performance against the goals. However, we urge HUD not to impose any requirements that would place greater informational burdens on lenders that originate and sell loans to the GSEs. We are concerned that should community banks, particularly those that originate a relatively low volume of conforming loans, face additional information or reporting burdens, they will be less inclined to sell the loans to the GSEs, directly or indirectly through conduit relationships.

Rural Definition Should Continue to be Based on Counties

Under the current rule, in rural areas, mortgage purchases count toward the Underserved Areas Housing Goal where such purchases finance properties that are located in underserved counties. These are defined as counties where either: 1) the median income in the county does not exceed 95 percent of the greater of the median income for the non-metropolitan portions of a) the state or b) of the nation as a whole; or 2) minorities comprise at least 30 percent of the residents and the median income in the county does not exceed 120 percent of the greater of a) state non-metropolitan median income or b) nationwide non-metropolitan median income. HUD proposes to use census tracts for establishing whether properties in rural areas count toward the Underserved Areas Housing Goal instead of counties.

HUD originally adopted its current county-based definition for targeting GSE purchases to underserved rural areas primarily based on information that rural lenders did not perceive their market areas in terms of census tracts, but rather, in terms of counties. (ICBA strongly urged HUD to use county rather than census tract based on comments from rural lenders when previous goals were being set.) HUD states that a further consideration was the lack of reliability of geocoding software applied to rural areas.

HUD states that its recent research indicates that a census tract-based system would improve the extent to which the underserved area definition distinguishes areas by key socioeconomic and demographic characteristics such as median family income, poverty, unemployment, school dropout rates and minority populations. According to HUD, under a census tract-based definition underserved areas stand out more as areas of lower income and low economic activity and as having somewhat larger minority population proportions. HUD believes that a tract-based definition would also improve the targeting of the goal to areas with relatively greater housing needs.

ICBA urges HUD not to go forward with the definitional change. Community banks serving rural areas still operate using a county perspective, not a census tract perspective. They typically do not use geocoding products and would have to purchase them in order to determine where to originate loans that Fannie Mae and Freddie Mac would want to purchase to meet their goals. Since they generate a relatively low number of mortgages due to the lower population levels of their communities, it would be relatively expensive. We do not believe that community banks should bear the burden of this expense to facilitate the ability of HUD to check the GSEs' performance against their goals.

ICBA has compared census tracts versus counties in several states and discussed the difference with local bankers serving the areas. They were often puzzled by the results, expressing surprise that certain parts of a county that they were very familiar with might be considered served when measured by census tract. In several cases areas known by the local banker as being inhabited primarily by very low income people with affordable housing needs was not included in some census tracts. They suggest that sparse population in some areas may inappropriately skew the result.

Community bankers who serve less populated rural areas also will find it difficult to target market to census tracts, as they typically market to a larger geographic area for cost savings and practicality. It would be difficult for community banks serving rural areas to use their marketing efforts, typically covering several counties, for mortgage products that are only targeted for potentially one census tract within a county.

ICBA urges HUD not to change the definition of rural areas from one based on counties to one based on census tracts to facilitate HUD's ability to monitor the GSEs' performance against their goals. The change does not reflect the reality of how rural businesses operate and we have serious concerns that it will be counter-productive, making it more difficult for lower income and minority residents of rural communities to obtain affordable mortgages. This is particularly important, since in recent years, more and more minorities have moved to rural areas for agriculturally related jobs previously filled by non-minorities. For a number of years, ICBA has urged Fannie Mae and Freddie Mac to do more to help community banks in rural areas meet the affordable housing needs of their customers. Some progress has been made, but much more is needed.

Sub Goals Inappropriately Allocate Credit and Could Disrupt Markets

HUD proposes to establish sub goals for home purchase loans that qualify for the housing goals to assure that the GSEs focus on financing home purchases for targeted homeowners. However, these sub goals would only apply for loans originated in metropolitan areas. ICBA has very strong general and specific concerns about this portion of the proposal.

First, we are very concerned about HUD's effort to place such a strong focus on home buying at the expense of mortgage refinances. We are concerned that in certain economic environments, as the one we have just experienced during the recent downward cycle in interest rates, such a focus on financing home purchases could cause serious disruptions in the mortgage market. This clearly is in conflict with the mandate that Congress gave the two GSEs in their charters to provide stability in the secondary market for residential mortgages. In our view, HUD inappropriately is using the proposed sub goal to allocate credit by stressing the purchase of mortgages made for the purchase of homes, limiting the access to credit for those who wish to refinance mortgages to benefit by lower interest payments or to obtain a cash out refinance for home improvements or other purposes.

In addition, we strongly object to HUD's proposal to target only metropolitan areas, ignoring needs in rural areas. We believe that this proposed limitation conflicts with Congress' intent when it charged the GSEs in their charters to "promote access to mortgage credit throughout the Nation (including central cities, rural areas, and underserved areas)." While lower income and minority residents of metropolitan areas certainly need more financing options for affordable housing, so do lower income and minority residents of rural areas. We strongly object to HUD allocating credit in this manner.

HUD Should Encourage Redevelopment of Secondary Market for Manufactured Housing

One area in particular where we believe the GSEs should play a strong leadership role is in the redevelopment of the market for mortgages financing manufactured housing. In many parts of the country, manufactured housing is a very important source of affordable housing. For example, in New Mexico, manufactured housing constitutes more than half of all homes. States located in the southeastern portion of the United States are similarly dependent on this type of affordable housing. Yet financing for these homes is difficult for a variety of reasons that are challenging for individual lenders to address.

Fannie Mae and Freddie Mac have an important role to play in revitalizing the secondary market for manufactured housing mortgages. They have the expertise and experience in the secondary market and the national perspective needed to promote financing for this important type of affordable housing. ICBA urges HUD to encourage the GSEs to do more to make the secondary market for manufactured housing mortgages viable.


As GSEs, Fannie Mae and Freddie Mac clearly have a congressionally mandated responsibility to promote low-and moderate-income housing, housing in central cities, rural areas and other underserved areas and special affordable housing through annual housing goals. ICBA strongly supports the intent of the goals but is very concerned that the new goals proposed by HUD may be overly aggressive and could result in secondary market disruptions. HUD should work closely with Fannie Mae and Freddie Mac to develop goals that accurately reflect the market, yet challenge them to do even more to finance affordable housing.

ICBA urges HUD to retain the current definition of rural underserved areas that is based on counties. We do not believe that the use of census tracts as the determinant accurately reflects the realities of rural lending and will make it difficult for rural lenders to identify and market to the lower income and minority borrowers that HUD seeks to target through the goals.

Also, we urge HUD not to set sub goals for the purchase of loans in metropolitan areas as proposed. We see the sub goals as an inappropriate allocation of credit that stresses home buying and which could limit access to credit for consumers that seeking to lower mortgage costs or improve their homes. We also object to the special emphasis placed on lending to metropolitan areas, as residents of rural areas also need more financing options.

We appreciate the opportunity to comment. If you have questions or need any additional information, please do not hesitate to contact Ann Grochala, Director of Lending and Accounting Policy, at 202-659-8111 or ann.grochala@icba.org.


Camden R. Fine
President and CEO

1 The Independent Community Bankers of America represents the largest constituency of community banks of all sizes and charter types in the nation, and is dedicated exclusively to protecting the interests of the community banking industry. ICBA aggregates the power of its members to provide a voice for community banking interests in Washington, resources to enhance community bank education and marketability, and profitability options to help community banks compete in an ever-changing marketplace. For more information, visit ICBA's website at www.icba.org.

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