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We've also used technology to expand our underwriting criteria, so that we can reach underserved communities. For example, our Expanded Approval products make it possible for people with blemished credit to obtain a conforming mortgage loan. And we've added a Timely Payments Reward feature to those loans, enabling borrowers to lower their mortgage payment by making their payments on time. These mortgage features have been crucial tools in reaching into communities that were previously underserved. The mortgage market today has a wider variety of products available than ever before, and therefore is better poised to meet the individual financing needs of a broader range of home buyers.

Not only has innovation created a wider variety of mortgage products targeted to individual borrowers' needs, it has also streamlined the cost of processing a new mortgage loan. Our system has brilliantly harnessed the power of information technology to make the process of financing or refinancing a home faster, cheaper and easier for consumers, and more efficient for the industry.

The highly liquid and efficient mortgage market laid the foundation for the refinance boom of the last two years. This has enabled borrowers to take advantage of the lowest interest rates in decades and thereby save billions of dollars in interest costs. In a speech delivered on March 4, 2003 to the Independent Community Bankers of America, Federal Reserve Chairman Alan Greenspan reported that in 2002, close to 10 million mortgages were refinanced, and that households "cashed out" almost $200 billion of their accumulated home equity, likely using as much as half of that amount to modernize their homes and for personal consumption -- spending that directly affected GDP and jobs. He went on to say that approximately half of that cashed out equity went to consumption - consumption spending that provided much needed support to an otherwise flagging economy.

Greenspan acknowledged the significance of record low mortgage rates in the refinancing wave. He also pointed out that the relative ease in the process of refinancing, compared to ten years ago, played a significant role in prompting these additional household expenditures.

"Even as recently as the late 1980s, a family that wanted to use housing wealth to finance consumption would have faced an expensive and time-consuming process...Although substantial home equity wealth has existed for many years, only in the last decade or so has secured borrowing against home equity become a cost-effective source of credit in a wide variety of circumstances.

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He concluded his remarks by noting, "Home equity extraction may be the household sector's realization of the benefit of a rapidly evolving financial intermediation system."

Fannie Mae has played an integral role in standardizing the mortgage process through technology, to make it faster and less expensive for lenders and for consumers to refinance into lower cost mortgages and to cash out some of the equity in their homes.

From the inception of our technology efforts, Fannie Mae's vision has always been to create technology that was scalable through economic ups and downs. Through our technology, our underwriting flexibilities and our access to capital, Fannie Mae has been able to work with lenders across the country to insure that, no matter the size of the market, lenders are able to service their borrowers effectively and efficiently. Without that technological progress, the industry may well have been overwhelmed and unable to accommodate the refinance wave of the last two years.

In a 2002 study, MORTECH, a company specializing in research on the mortgage industry and its use of technology, found that the use of automated underwriting systems (AUS) was nearly universal. That represents a complete transformation of the industry over the last ten years. Virtually all underwriting was manual in 1993. By 2002, 91.3 percent of lenders had implemented automated underwriting. An estimated 75 percent of loan applications were underwritten using automated underwriting in 2002.

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Technology has enabled lenders to handle volumes that have more than tripled in the last ten years. During the 1993 refinance boom, the mortgage industry originated $1.0 trillion in mortgage loans, of which 52 percent was comprised of refinance transactions. This year, we are projecting that the mortgage industry will originate over $3.3 trillion, with over 67 percent being refinance transactions. Without today's technology, the 1993 mortgage market was both paper and people intensive. In 1993, refinancings were treated no differently from regular purchase mortgages. A homeowner seeking to refinance had to fill out a complete application, wait two weeks or longer for approval, order a full house inspection and wait an average of 45 days to close. The inefficient process added dollars and time to the homeowners' cost.

Today is quite different. The introduction of technology has dramatically improved lender efficiencies. With automated underwriting, a lender can provide a borrower with an approval in minutes. In fact, more than 75 percent of applicants are now approved in two to three minutes. And more importantly, lenders who have integrated technology into their business processes witnessed tremendous cost savings. Automated underwriting systems have cut origination costs for mortgage banks, commercial banks, and thrifts. And borrowers have reaped the rewards, in lower mortgage costs.

Automated Underwriting Has Lowered
Borrower Costs

Borrower Origination Costs Since 1993

$1,400

[graphic]

$1,300

$1,200

$1,100

$1,000

$0

1993 1994 1995 1996 1997 1990 1999 2000 2001

Source: MORTECH Origination Costs on a $100,000 Loan

2002/03

2002

Technology also impacted our ability to do business at lower costs. Fannie Mae had difficulty handling the volumes in 1993. In the peak month of the 1993 refinance boom, we had 631 people processing 320,000 loans. We hired a large number of temporary employees to handle the huge volume of paper. This year, at the peak of the refinance wave, 250 Fannie Mae employees processed one million loans a month

Providing Leadership in the Market

The 1992 Act focused Fannie Mae on our mission and gave us the flexibility to innovate to meet that mission. As a result, we now lead the market in funding mortgages for low-income and minority home buyers.

There have been many studies that have attempted to measure Fannie Mae's impact in the market. Last week, you heard that some of these studies showed that Fannie Mae lags the primary market in funding mortgage loans for low-income and minority homebuyers. Actually, the most recent data show that Fannie Mae leads the market, by measurements HUD uses and by more common measurements.

Fannie Mae is the nation's largest private investor in affordable housing and minority lending. Since 1994, Fannie Mae has financed homes for more than 12 million low- and moderate-income families and more than 4.8 million minority families. Further, the fact is that - when measured against the market in which we operate - Fannie Mae's performance on affordable housing lending has consistently surpassed the primary market's performance.

Two weeks ago, Secretary Martinez's testimony repeated analysis from the President's budget that Fannie Mae's affordable housing performance in our single-family business lagged the primary market

as measured by Home Mortgage Disclosure Act (HMDA) data. The Secretary's testimony cited data from 1999 that HUD believes showed that we lagged the market that year.

Over the years, Fannie Mae has disagreed with HUD's methodology for defining market leadership primarily because the Department has used a definition of the primary market that includes a large part of the subprime market, where Fannie Mae has traditionally not operated. If the subprime market is not included, a HMDA-based market leadership analysis shows that we have consistently led or matched the conventional market in the past.

In 2001, 43.1 percent of Fannie Mae's single-family business served low- and moderate-income borrowers compared to 42.0 percent for the conventional, non-subprime market. A total of 23.0 percent of Fannie Mac's business served minority homebuyers compared to 21.3 percent for the conventional conforming market. We led the conventional conforming market in lending to African Americans, 5.2 percent to 4.4 percent, and matched the market in lending to Hispanics at 9.0 percent. These comparisons are based on owner-occupied, home purchase mortgages in MSAs - the appropriate subset for comparisons between HMDA and Fannie Mae data.

In recent years, Fannie Mae has sought to extend financing to those with imperfect credit, but those advances are not captured in the analysis cited by the Secretary, which focused on data from 1997 through 1999. As a result, since 2001 Fannie Mae has led the market even using the broader definition of the comparison market employed by HUD. Using HUD's definition of the primary market, the 2001 data reveals that Fannie Mae led the market in purchasing loans to low- and moderate-income households (43.1 percent to 42.7 percent), minority borrowers (21.9 percent to 20.8 percent), and African-American borrowers (5.2 percent to 5.0 percent). This represents our own best efforts to replicate HUD's methodology, as HUD has not yet published any analysis using 2001 data.

Fannie Mae's affordable lending performance in 2002 was also excellent, with the percentages of our single-family business serving low- and moderate-income and minority borrowers increasing over the exceptional 2001 levels. For owner-occupied, home purchase lending in metropolitan areas Fannie Mae achieved a 45.7 percent level in low-mod lending (representing a total investment of $69.3 billion for these borrowers), a 26.2 percent level in minority lending ($46.1 billion), a 5.4 percent level in lending to African Americans ($8.3 billion), and 11.0 percent level in lending to Hispanics ($18.3 billion). The 2002 HMDA data for the market were released in August, but cannot be fully analyzed until HUD provides its list of subprime lenders reporting to HMDA - which we expect to receive in October.

Finally, HUD data is focused entirely on single-family homes. None of this analysis includes any of the impacts from our investments in Low Income Housing Tax Credits, multifamily affordable rental housing, Mortgage Revenue Bonds or the other community development investments we make through our American Community Fund.

Market leadership is about qualitative as well as quantitative contributions. Fannie Mae has been an innovative leader in the affordable housing field. The company was at the forefront of the mortgage industry expansion into low-downpayment lending, initiating the purchase of the Fannie 97 mortgage in 1994 as the first widely available and standardized 3 percent down mortgage product and offering loans with as little as a $500 contribution from the borrower today.

We've also harnessed technology to break down the lending barriers minorities often face, mainly by making our automated underwriting system even more flexible so lenders could provide Fannie Mae financing to families with atypical financial profiles. For example, we provided more feedback in the

underwriting findings so that lenders could help consumers understand what went into the decision so they could try to fix any problems and get a “yes” decision from that lender.

Our investments in technology have expanded markets for our lender partners, and by reducing the cost of originations, enhanced affordability for the homebuyer. More recently, Fannie Mae has launched new efforts to serve borrowers with blemished credit histories. Our Expanded Approval and Timely Payment Rewards product lines are examples of how we help conventional mortgage lenders broaden their markets to serve borrowers previously left only to subprime lenders.

We've also used our role in the secondary market to change practices in the primary market to reduce
the prevalence of predatory lending. We are working in local communities throughout the nation to help
develop solutions to the problem of predatory lending. For example, in Essex County, NJ, Fannie Mae
worked with New Jersey Citizen Action, the U.S. Department of Housing & Urban Development, Essex
County, and interested lender partners to develop a workout solution was specifically crafted to help
more than 100 families primarily in Essex County who were victims of a property flipping scheme that
occurred from 1999 to 2001.

We work to support and increase public advocacy to protect mortgage consumer rights. We believe that all home-buying consumers should be treated equally and should have access to the lowest cost mortgage for which they qualify. We also want home-buying consumers to know the true cost of the mortgages they are being offered -- including all fees and charges.

We have established industry-leading anti-predatory lending policy guidelines to combat abusive lending practices in the marketplace. By setting tough standards and at the same time making conventional mortgage products more widely available, we are working to see that good practices chase bad practices out of the mortgage market.

III: SOUND BUSINESS

Best in Class Disclosure

Fannie Mae has worked with Congress and the last two Administrations to create best-in-class disclosure and corporate governance practices for the company.

In 2000, in consultation with the Treasury Department and members of this committee, Fannie Mae crafted a set of proposals designed to place it at the leading edge of safety and soundness practices. These voluntary initiatives include commitments to issue subordinated debt, obtain an annual “risk to the government" rating, enhance our liquidity planning, disclose more information about interest rate risk and credit risk sensitivity, and implement and disclose the results of an interim risk-based capital standard. In several cases, we created financial structures and disclosures that have little precedent among financial institutions. Taken together, these initiatives give investors and policymakers more information about Fannie Mae's risk exposure -- and confidence that Fannie Mae can manage that exposure than they can get from any other financial institution. We continue to meet every one of the voluntary initiatives.

These disclosures, combined with the regulatory mechanisms Congress enacted in 1992, place Fannie Mae at the vanguard of risk management and disclosure practices worldwide, with cutting-edge regulatory discipline bolstered by cutting-edge market discipline.

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