Prof researches home loans
By ERIN PIROUTEK
Assistant News Editor
Home ownership is an integral part of the American dream. A loan, however, is often a prerequisite to purchasing a home.
Recent research by Notre Dame sociology professor Richard Williams, suggests that two government-sponsored mortgage lending associations are not doing enough to make credit available to low income families.
Williams' work began in the early '90s when a local community group asked him to evaluate the performance of banks and mortgage lending companies in the area. He quickly found discrepancies between lenders with respect to low-income and minority markets.
These results encouraged Williams to expand his research.
"We wanted to find out not just that disparities existed but why they existed," said Williams. At about this time, he received a request from the Department of Housing and Urban Development (HUD) to investigate Government Sponsored Enterprises (GSEs).
The GSEs Fannie Mae and Freddie Mac are privately-owned mortgage companies, but they receive substantial government benefits, such as reduced credit rates. In 1995, the Congressional Budget Office estimated that Fannie Mae and Freddie Mac's benefits totaled $6.5 billion.
In return for these benefits, GSEs have the responsibility to promote home ownership in under-served markets, which would include low-income and minority borrowers.
The mortgage market has two components, primary lenders and secondary lenders, which include GSEs. The primary lenders deal with customers and make the loans.
Then, to give the primary lenders money to make more loans, the loans are usually sold to secondary lenders, who assume the responsibility for the loan.
"Someone has to take the risk of default. … That's why the secondary market is important," Williams said.
Primary lenders are unlikely to make loans, if they cannot sell them to a secondary lender. Therefore, if GSEs or other secondary lenders will not buy loans from low-income and minority markets, it is difficult for low-income and minority individuals to get loans.
There are a lot of people who seem qualified for home ownership, but can't obtain the necessary financing, he said.
Williams studied Indiana mortgages from 1992-96 and found that rather than leading other institutions in percentage of loans to under-served markets, the GSEs performance consistently lagged. GSEs lending patterns mirrored those of institutions that did not receive government support.
Barry Zigas, senior vice president and executive director of Fannie Mae's national housing impact division, defended Fannie Mae's actions to Inside Mortgage Finance magazine.
"We believe we are leading the market in most areas and certainly matching it," said Zigas, while commenting that GSE performance could be worse in some small markets.
Williams countered Zigas' objections by noting that Indiana, a state of 5 million people, should not be considered a small market. Williams also noted that national studies and a study in Kansas City have found similar GSE failures.
Williams' work may help make credit more available to low-income and minority markets.
"Because of several studies that all seem to point in the same direction, there is an attempt by HUD to raise the standards that GSEs have to meet," Williams said.
All News Stories for Friday, February 4, 2000
