A year ago, with considerable fanfare, the Federal National Mortgage Association announced what it described as a major investment program to aid urban home buyers.
The giant corporation, which buys mortgages in the secondary market to stimulate mortgage lending, said it planned to increase from $200 million to $700 million its program to buy interests in residential and commercial mortgages from private lenders. The country's largest buyer of mortgage loans, Fannie Mae said that through reinvestment the total new private development money for cities could have reached $1.4 billion.
But today, as the housing industry is mired in recession, that ambitious program appears to be stalled. To date, the urban loan participation program has resulted in the purchase of $303.4 million in mortgages.
The first $150 million was snapped up quickly in the initial year of what was conceived as a two- to-three year program. Yet purchases declined to $122 million last year, and the first quarter of 1980 is running at about the same rate. Future prospects look dim unless interest rates drop considerably, said Fannie Mae officials who declined to be identified.
While Fannie Mae has been meeting government-imposed minimums for urban lending in its conventional auction programs, a new HUD audit shows, special programs initiated last June to help finance inner-city rehabilitation projects have suffered, Fannie Mae data indicates. Among the results:
The "convertible urban standby commitment program" -- through which Fannie Mae pledged to buy set amounts of conventional or FHA-VA mortgages up to 12 months in advance to allow time for rehabilitation to be completed -- was suspended for three months starting in November after the Federal Reserve put a rein on credit.
A total of $169.8 million was disbursed through that program during the first quarter of 1980.
A program for rehabilitation loans covered only one $45,100 project. Loans to lenders on the security of mortgages stopped at $250,000.
A program to provide individual mortgages for urban properties has lead to $19.9 million in commitments. Since the beginning of 1979, $9.67 million in mortgages has been purchased as a result of the program.
A program for buying conventional mortgages on two-to-four-family dwellings, aimed primarily at aiding older urban neighborhoods, has resulted in $637 million in mortgage purchases since February 1979.
Noting the size and nature of some of these programs when compared with Fannie Mae's assets of $52 billion, one HUD critic labeled them nothing but "blue smoke and mirrors."
These special urban programs resulted from a confrontation several years ago between the then-secretary of housing and urban development. Patricia Roberts Harris, and Fannie Mae Chairman Oakley Hunter.
Harris, accusing Hunter of paying more attention to profits than to the needs of inner-city housing, set about reexerting HUD's authority over Fannie Mae by trying to force Hunter out and appoint government members to its board of directors. (Fannie Mae was chartered by Congress but is an independent stock corporation.)
Though her efforts at reorganization failed, Harris did succeed in getting regulations passed requiring that in any given year 30 percent of Fannie Mae's purchases of conventional mortgages must be secured by properties located in central cities. Moreover, 30 percent of all the mortgages purchased must be based on housing for low- and moderatge-income families.
HUD has recently finished an audit of mortgage purchases made by Fannie Mae in 1978 through its regular system of auctions. The report concluded that of the $5.5 billion in conventional mortgages purchased by the firm, $1.7 billion -- 31 percent -- were in central-city housing. HUD found that 36 percent of the loans were secured by houses for low- and moderate-income families.
(With the exception of the $700 million urban loan participation program, the loans purchased through the other special programs are counted in the $1.7 billion in inner-city purchases. Fanie Mae made purchases of $5.4 billion in 1979, but the amount spent in central cities has not yet been determined.)
Although Fannie Mae exceeded HUD's 30 percent standards, the report noted that the loans were not evenly spread throughout the country. More than 51 percent originated in just three states -- California, Texas and Washington.
More loans were purchased from Houston than from all of the eight largest metropolitan areas in the Northeast, HUD found. In the Dallas-Fort Worth area, more than 43 percent of the loans purchased were for central-city properties.
In contrast, 13 percent of the loans bought in metropolitan Washington and 9 percent of those from Newark related to central-city properties.
Sen. William Proxmire (D-Wis.), chairman of the Senate Banking, Housing and Urban Affairs Committee, commented this week: "The highly skewed pattern of Fannie Mae's conventional loan purchases, with three states getting over 50 percent of the loan purchases while most states get only a small number of loans, raises important questions about whether the effect of Fannie Mae's program is consistent with broad national objectives to target resources where they are most needed, particularly toward older urban neighborhoods."
The same point was raised in a letter from HUD Secretary Moon Landrieu to Oakley Hunter that was attached to a copy of the audit obtained by The Washington Post. It read: "This pattern of loan purchases raises questions as to whether (Fannie Mae) is serving a national need, as the Congress intended, or a far narrower regional need by virtue of its method of operation, its institutional structure or a combination of these and other factors." The letter bore no date because it was never sent.
Sources said the letter had not been approved and was awaiting elimination of any contentious language before it was posted. They stressed that the era of confrontation between HUD and Fannie Mae is over and that the two working together now as equals.
No action is contemplated as a result of the audit, HUD officials said. No new regulation will be sought, for example, to try to dictate equal geographical distribution of loan purchases, the officials said. They indicated that the recent federal preemption of state usury ceilings on mortgages should rectify this situation substantially.
The Landrieu letter did not accuse Fannie Mae of willful discrimination in pumping more money into the prosperous Sun Belt than into the older depressed cities of the nation.
HUD officials said they recognized that, despite the widely publicized back-to-back cities movement, there ws actually little demand for inner-city housing in the Northeast and North Central states. They said that usury laws ther held down mortgage interest rates and made resulting yields unattractive to investors.
And, they contended, lenders in those areas are more inclined to keep mortgages in their portfolios than to sell them on the secondary market to Fannie Mae or other purchasers. This occurs because the primary lenders in the Northeast are savings banks, which traditionally keep their loans, whereas as mortgage bankers operating in the Sun Belt sell theirs.
One implication of the HUD findings is that the special programs established by Fannie Mae to interest lenders in making and selling central city loans proved no match for stronger markt forces. Fannie Mae, forced like all corporations to offer their investors the highest yields at a time when interest rates were skyrocketing, naturally gravitated to the areas where the greatest number of loans were for sale due to a capital shortage, and where the lack of state usury ceilings resulted in mortgage loans with the highest rates.
In the future, when interest rates have come down, the urban program will be revived, with some changes, both HUD and Fannie Mae officials said. HUD is considering several options, such as establishing an over-the-counter window in the regular auction process for certain types of loans or increasing servicing fees to lenders to make loans more attractive. Fanie Mae officials said they would prefer to work urban programs into the regular auction system. To this end, the corporation has begun an advertising campaign to convince savings institutions to sell Fanni Mae more of their entire mortgage portfolios rather than restricting them to just sales or urban loans.