The $930,000 Tudor house Jeffrey and Lisa Stegman bought on nearly two acres in Cincinnati in 2001 probably isn't what lawmakers had in mind when they ordered government-sponsored housing giants Fannie Mae and Freddie Mac to help disadvantaged home buyers.
But Freddie Mac, according to a rival financial services industry group, eventually bought the Stegmans' $275,000 mortgage. And because their house was located within a census tract that met the Department of Housing and Urban Development definition of an "underserved area," and because they put down $655,000 cash and thus didn't need a jumbo mortgage, their loan qualified for credit toward the companies' affordable housing goals.
Freddie Mac and Fannie Mae: Understanding the complexities of the organizations that help fund the nation's housing market
Jeffrey Stegman, chief executive of a manufacturing company, was surprised at the notion that his loan could be counted toward the quotas. "[It's] a loophole . . . and I think that's terrible," he said.
Actually, it's not a loophole -- it's federal housing policy in action. The Stegmans' stately Tudor may be an extreme example, but it illustrates the tensions inherent in a system that looks to two profit-driven companies to help low-income and minority home buyers.
As wholesalers for the mortgage industry, Fannie and Freddie borrow money from investors to buy mortgages from lenders. They also repackage mortgages into securities for sale to investors, adding their own guarantee that investors will receive the promised principal and interest. They charge lenders a fee for that service.
They have become two of the nation's largest financial institutions, with combined profits of $12.8 billion last year. Through their decisions as to what kinds of mortgages they will purchase or securitize, they exert enormous influence on the mortgage industry and the borrowing options available to consumers.
The government has conferred tax exemptions and other advantages on Freddie and Fannie so they will provide a steady flow of funds to mortgage lenders. Government sponsorship has saved the companies billions, chiefly by helping them borrow money more cheaply, the Congressional Budget Office has said. In the early 1990s, lawmakers demanded that the companies use their advantages to meet specific affordable housing quotas as well.
HUD is now reexamining the mechanics of the system, proposing to raise its goals for Fannie and Freddie. The companies are strongly opposing the proposed new goals. During a comment period that closed recently, they argued that the department was making unrealistic demands that could force them to curtail funding for borrowers who don't count toward the goals.
Failure to meet the goals is not likely to cost the behemoth companies much in fines, compared with the scale of their operations. But it could bring a public relations black eye that they would prefer to avoid, particularly against the backdrop of the Bush administration's ongoing struggle to tighten regulation of the two mortgage giants.
In their advertising, Fannie and Freddie emphasize that they help people buy houses. "Our public mission, and our defining goal, is to help more families achieve the American Dream of homeownership," Fannie Mae says on its Web site. "No company in America is more committed to expanding minority homeownership," the company says.