QUESTIONS SUBMITTED FOR THE RECORD FROM CHAIRMAN STOKES

QUESTION: In your statement, Mr. Knight, you mentioned that the Corporation is currently working with Freddie Mac, Fannie Mae and Mortgage Guarantee Insurance Corporation (MGIC) to create a first-mortgage product suitable to distressed, lower-income communities. Would you explain to us what prompted this venture? Did the Corporation develop an action plan for doing this? Are there any risk, financial or otherwise, associated with this proposed venture the Corporation has knowledge of?

ANSWER:

Repeatedly, local NeighborWorks® program reported during the planning for the NeighborWorks Campaign for Home Ownership that to significantly increase homeownership among the families earning less than $30,000 it was necessary to involve the national capital markets.

Lenders working with NeighborWorks® organizations have developed local portfolio products on an individual basis to address the needs of lower income families and properties in distressed communities. To involve a larger number of lenders, and increase the volume that any one lender can achieve, these loans must be sellable on the secondary market. NeighborWorks® organizations experience was that the standard secondary market underwriting standards locked out most families living in distressed communities: the typical "red flag" assumed to be predictive of default did not apply to families working with NeighborWorks® programs.

Among underwriting issues that are critical are:

the

Borrower Cash Requirements Lower income families do not have enough cash to make the "normal" down payment, closing costs and cash reserved requirements. Under these new products, borrower cash may be as low as two percent of transaction, or $1,000 (whichever is less) purchases up to $80,000. During the first six months of the Home Ownership Campaign, the median family income of the home buyers was $22,800. One thousand dollars of that amount represents four percent of that annual income.

for

Debt to Income Ratios - Total debt to income ratios have been increased to 38 percent, and up to 42 percent, when a family has demonstrated experience with a good payment history at that level. Experience to date shows that 40 percent of the families assisted into homeownership by the NeighborWorks® network are paying less in monthly payments as homeowners than they paid as renters.

Nationally, 88 percent of the 17 million renters who pay more than one half of their incomes for rent have incomes less that 80 percent of median income.

is

Appraisal Value It is frequently difficult for
appraisers to assign an appropriate property value
in distressed neighborhoods, particularly when
rehabilitation
involved.
Το assist in
addressing this problem, and to enable the balance
of the down payment, closing costs and rehab costs
to be financed, the combined loan to value ratios
can be as high as 120 percent on 25 percent of the
loans. When no rehabilitation is involved, the
maximum combined loan to value is 105 percent of
the appraised value.

Under these demonstration products, Fannie Mae and Freddie Mac will purchase 95 percent loans insured by MGIC. The balance of the financing will be provided by loans arranged by the NeighborWorks® organizations.

We have negotiated initial demonstrations with Freddie Mac, Fannie Mae and MGIC with a clear understanding that volume will increase as the Campaign moves forward. The initial demonstration involves $20 million with Freddie Mac, and $7 million with Fannie Mae.

This product represents a significant breakthrough in the deadlock on lending to lower income families in distressed, older communities. Neighborhood Reinvestment will keep the Committee informed of results and progress.

The Corporation does have an action plan based to reach the goal of 10,000 new lower-income homeowners over the remaining four years of the Campaign. The next steps in the action plan have the Corporation focused on training the staff of the 55 participating NeighborWorks® organizations in the use of the new products. We will track the results and report them.

There are certainly risks associated with this project. The largest risk was to do nothing and continue to watch hundreds of communities deteriorate because families do not qualify to purchase homes under standard secondary market guidelines in distressed neighborhoods. There is also a risk that the program will not find acceptance among the Fannie Mae and Freddie Mac sellers/servicers, and thus few mortgages would be originated.

In addition, there is the risk that the loans will be made and experience a high default rate, exceeding the risk reserve pool. This would not only lose the 0.6 percent risk reserve that Neighborhood Reinvestment is setting up with MGIC, but also end Freddie Mac's, Fannie Mae's and MGIC's appetite for an extension of the demonstration.

However, there are no financial risks to the Corporation (or the Government) beyond the funds allocated to the risk reserve pool.

Clearly, if defaults are very high, the Corporation risks damage to its reputation. Part of the commitment from Fannie Mae and Freddie Mac however, involves the provision of delinquency information to Neighborhood Reinvestment so that poor performance will be identified and corrected for as early as possible.

There is the risk that the product will be wildly successful, maintain reasonable delinquency/default characteristics in the early years and not be expanded quickly enough to meet the needs. Because it takes over four years to have a reasonable reading on the delinquency/default characteristics of a "book of business," the initial demonstration amount may be used up before the business evaluation is in. The resulting pause could be damaging in terms of community renewal and continued development of systems. On balance this is a risk that must be taken if private sector capital is to be utilized in any significant amount to renew our distressed lower income communities.