Federal National Mortgage Association Research Articles

Option Pricing, Zero Lower Bound, and COVID-19

This paper provides a quantitative assessment of equity options priced at the Zero Lower Bound, i.e., when interest rates are set essentially to zero. We obtain closed form formulas for American options when the Zero Lower Bound policy holds. We perform numerical implementation of American put options written on the stock Federal National Mortgage Association (FNMA) and of related bounds for the optimal exercise. The results show similarities with the corresponding European options priced at the Zero Lower Bound during the COVID-19 crisis.

Book Reviews

Sumit Agarwal of National University of Singapore reviews “Last Resort: The Financial Crisis and the Future of Bailouts,” by Eric A. Posner. The Econlit abstract of this book begins: “Argues that, in responding to the financial crisis that began in 2007, the US government violated the law and was able to gain control over AIG, the Federal National Mortgage Association (Fannie Mae), and the Federal Home Loan Mortgage Corporation (Freddie Mac) early in the critical stage of the crisis—but it did so in the public interest.”

Leadership in Sustainability a Case Study: Green Globe Certification and Financing and the Impact on a Multifamily Property's Rate of Return

Environmental sustainability in real estate continues to be of interest, and various government incentives have emerged to encourage investment in sustainability efforts. In this detailed case study, we examine one incentive, the Federal National Mortgage Association's (Fannie Mae) Green Initiative and Green Globes certification, as applied to a newly constructed multifamily complex. Using a discounted cash flow model with several scenarios, the after-tax returns for the multifamily project are examined. In this case study, we analyze the initiative's impact on the project, showing the effects of the lower financing costs. The conclusion is that in addition to societal benefits, lower operating costs, and higher rents, the rate of return can be higher for properties that utilize Green Globe's special financing.

Government-Backed Mortgage Insurance Promoted a Speedier Recovery from the Great Recession

The United Sates government has a long history of involvement in mortgage finance. During the 1930s, the government created the Federal Home Loan Banks (FHLB), the Federal Housing Administration (FHA), and the Federal National Mortgage Association (Fannie Mae). In this note, we estimate how the intensity of GSE, FHA, PLS, and portfolio exposures influence the state of the real economy across counties.

The Rescue of Fannie Mae and Freddie Mac

The imposition of federal conservatorships on September 6, 2008, at the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation—commonly known as Fannie Mae and Freddie Mac—was one of the most dramatic events of the financial crisis. These two government-sponsored enterprises play a central role in the US housing finance system, and at the start of their conservatorships held or guaranteed about $5.2 trillion of home mortgage debt. The two firms were often cited as shining examples of public-private partnerships—that is, the harnessing of private capital to advance the social goal of expanding homeownership. But in reality, the hybrid structures of Fannie Mae and Freddie Mac were destined to fail at some point, owing to their singular exposure to residential real estate and moral hazard incentives emanating from the implicit guarantee of their liabilities. We describe the financial distress experienced by the two firms, the events that led the federal government to take dramatic action in an effort to stabilize housing and financial markets, and the various resolution options available to US policymakers at the time; and we evaluate the success of the choice of conservatorship in terms of its effects on financial markets and financial stability, on mortgage supply, and on the financial position of the two firms themselves. Conservatorship achieved its key short-run goals of stabilizing mortgage markets and promoting financial stability during a period of extreme stress. However, conservatorship was intended to be a temporary fix, not a long-term solution, and more than six years later, Fannie Mae and Freddie Mac still remain in conservatorship.

There Is No Accounting For Fannie Mae

<p class="MsoNormal" style="text-align: justify; margin: 0in 0.5in 0pt;"><span style="font-size: 10pt;"><span style="font-family: Times New Roman;">The Federal National Mortgage Association (FNMA, Fannie Mae), was created in 1938, as a part of the New Deal.<span style="mso-spacerun: yes;">  </span>In 2003, regulators discovered serious accounting problems that may cost Fannie Mae several billion dollars in losses. In 2003, the Office of Federal Housing Enterprises Oversight (OFHEO) investigated Fannie Mae and found a culture of corruption, arrogance, and pervasive accounting violations in the company.<span style="mso-spacerun: yes;">   </span>Executives at Fannie Mae cooked books to pocket an extra twenty-seven million dollars in bonuses.<span style="mso-spacerun: yes;">  </span>This paper presents the accounting improprieties at Fannie Mae and the consequences that followed its investigation.</span></span></p>

The Fall and Rise of Fannie and Freddie: Securitization after the Meltdown

This article analyzes the rise and fall of the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Owners Loan Corporation (“Freddie Mac”). It explains why they should be revived, and suggests regulatory measures under which they can go forward on a sound basis.During the New Deal, the Administration and Congress perceived a need for a secondary market for mortgages, which had existed during the 1920s but collapsed with the 1929 crash. The market enabled mortgage originators to sell their mortgages, sometimes packaged into mortgage-backed securities, providing them with cash to lend to new borrowers. Congress attempted to fill this niche in housing finance by creating Fannie Mae in 1938.In 1966 Fannie Mae reinvented mortgage-backed securities to help finance the Vietnam War. These mortgage-backed certificates were so successful that Fannie Mae was divided in 1968 into the Government National Mortgage Association (“Ginnie Mae”), which remained a government agency, and the continuing Fannie Mae, which was privatized. In 1970, Freddie Mac was created, and also engaged in buying mortgages and packaging them into mortgage-backed securities.Both enterprises lacked meaningful regulation. They were not required to register with the SEC until after accounting scandals in 2002 showed that they needed oversight. They lacked even internal supervision until the Office of Federal Housing Enterprise Oversight (“OFHEO”) was established in 1992-but OFHEO was understaffed and weak. Outside auditors also failed to draw attention to major accounting problems.The lack of regulation was compounded by political pressures on both organizations to lower their standards to make housing more accessible. Originally, they would accept mortgages only with at least 20% down payments, but this fell to 3% by 2000. After the 2000, standards fell further as the associations began to purchase “subprime” loans with little prospect of repayment. When these loans began to default, both were unable to continue business as usual, and were forced into conservatorship.Conservatorship raises the question of whether Fannie and Freddie are necessary, or should be liquidated. This article argues that they are necessary. Experience has shown that purely private secondary mortgage markets are more sensitive than other securities markets to economic downturns-just when they are most needed to keep mortgage originating institutions lending. Moreover, the sheer volume of mortgages securitized by Fannie and Freddie-more than half the market after 2000-indicates that private securitization alone is insufficient.This leaves the question of how Fannie and Freddie should be regulated to keep them from relapsing after they leave conservatorship. The answer is effective regulation. This should have several key elements: (1) It must take into account the special characteristics of mortgage-backed securities; (2) it must provide minimum standards for capitalization of Fannie and Freddie, the characteristics of the mortgages they are permitted to buy; (3) there must be an outside financial regulator such as the Federal Reserve to enforce the regulatory rules; and there must be transparency both at the institutional level and in connection with the mortgage-backed securities to be sold, that can best be provided by the SEC.

The Likely Impact of the U.S. Recession on Negotiations with North Korea

IntroductionThe last six-party talk in Beijing ended on December 11, 2008, when negotiators were unable to reach an agreement on the issue of verification over the accuracy of the nuclear inventory given by North Korea in June 2008. The sticking point was North Korea's refusal to let international inspectors take samples from soil and waste at its nuclear facilities, which the United States had maintained was critical to reach an agreement. Complicating the issue, however, is the rapidly declining U.S. economy, as indicated by the real gross domestic product (GDP) that fell rapidly beginning in the fourth quarter of 2008. This paper reviews the state of the U.S. economy, measuring how serious the economic recession is, and then speculates on how the state of the U.S. economy may affect the future of negotiations with North Korea. The paper concludes with some suggestions on the direction North Korea and the United States might consider taking in the middle of the U.S. economic recession.History of the Credit Crunch of 2008Although there is no consensus on its exact duration, the beginning of the is believed to be in the early 1980s. The good times of the Great Moderation are characterized by significant reduction in fluctuations and improvements in aggregate output, employment, and inflation. for the Great Moderation include (a) improved monetary policy, (b) financial innovation, (c) increased global integration, (d) better inventory controls, and (e) good luck in the form of smaller exogenous shocks. As Federal Reserve Chair Ben S. Bernanke opined during his discussion of the Great Moderation at the 2004 meetings of the Eastern Economic Association, Explanations of complicated phenomena are rarely clear cut and simple, and each ... probably contains elements of truth.1 It may be premature to give credit to any or all of these explanations. It is yet to be known whether the latest Great Moderation is in a temporary halt or is over until the next Great Moderation appears on the horizon many years from now. The end of the Great Moderation did not begin with subprime mortgages. The end started long before the Great Moderation even began.Securitizing mortgages in the United States has a long history. 1968, the Government National Mortgage Association (Ginny Mae) was allowed to securitize FHA/VA mortgages backed by the U.S. government for resale in a secondary market. 1970, the Federal Home Loan Mortgage Corporation (Freddie Mac) started selling government-backed mortgage-backed securities (MBS). One writer noted, In 1981, the Federal National Mortgage Association (Fannie Mae) began issuing MBS, and soon after 'private-label' securitized products emerged for prime loans without the backing of the government.2 1982, the Alternative Mortgage Transaction Parity Act allowed variable-rate mortgages as an alternative to fixed-rate mortgages. 1986, the Tax Reform Act ended tax deduction for interest on loans with the exception of mortgage loans. All these changes played a role in leading to the 2008 credit crunch. It is important to note that these changes, standing alone, are nothing wrong. But they were abused during the early years leading to the 2008 credit crunch.During the Great Moderation of the 1990s and the early part of the 2000s, the rate of inflation was low and the economy grew steadily. During the same period, countries in Asia and the Middle East started to save an enormous amount of money. From 1996 to 2007, industrialized countries went from a current account surplus of $14 billion to a current account deficit of almost $500 billion. At the same time, noted a White House report, developing countries went from a current account deficit of $82 billion to a surplus of $760 billion.3 The influx of this capital lowered interest rates. These new wealthy were not satisfied with low interest earnings, and they searched for high-yielding assets. …

The Evolving Paradigm of Laws on Lead-Based Paint: From Code Violation to Environmental Hazard

This article explores the significance of an ongoing paradigm shift for the legal approach to lead-based paint in privately owned residential properties from a housing paradigm to an environmental paradigm. The housing paradigm, still prevalent in most state and local law, has resulted in general silence on the lead-based paint issue in the community and, consequently, to little actual abatement of the hazard. The shift to an environmental paradigm for addressing hazards of lead-based paint in private housing is reflected in some state and federal legislation. Because of its focus on the discovery of health hazards, on the handling of hazardous material, and on long-term planning, an environmental lens offers a paradigm more likely to lead to actual abatement of lead hazards. This article first explores the existing framework of laws on lead hazards. Lead poisoning seriously affects the health of children and pregnant women and disproportionately affects ethnic minorities. Federal legislation separate from the major environmental laws addresses the issue of lead-based paint in federally owned or subsidized housing, but that law has not been extended to privately owned housing. Participants in the housing system - owners, rental property managers, lenders - have resisted accepting responsibility for reduction of the environmental hazard of lead-based paint in part due to the expense of abatement and the uncertainty of safe abatement techniques and standards. State and local health, housing, criminal, and property transfer laws have been generally ineffective in bringing about change in the housing stock and in protecting the health of occupants from poisoning. Examples of stalemates that arise when seeking legal relief from lead hazards are drawn from Maryland law. The article next distinguishes the housing paradigm, under which tenant - landlord disputes have provided the context for the development of the law, from an emerging environmental paradigm, which calls for discovery and response to hazards when occupants, workers, or the community around the dwelling may be affected. The article explores elements of this paradigm in Massachusetts law, in 1992 federal legislation, and in voluntary private market response of requiring an environmental assessment of residential property by the Federal National Mortgage Association (FNMA), a secondary mortgage market entity. By requiring disclosure of this hazard in housing to potential buyers and tenants, the federal government may force the residential real estate market to take the hazard into account in setting the rental amount and sales price. Market aversion to risks of liability and to loss of investment is likely to bring about voluntary compliance with hazard abatement laws. The interdisciplinary approach endorsed in the 1992 legislation is particularly appropriate for an area in which public knowledge and technology are changing. The article concludes with recommendations about how state and federal law on lead hazards might further develop as the paradigm takes hold. At the federal level, the government should set uniform standards for lead dust levels and safe abatement, and should provide a funding mechanism for hazard abatement. At the state level, the law should require both testing and disclosure before the sale of real property, testing and hazard abatement before rental, and provisions for relocation of tenants at landlord expense during hazard abatement. Local registration laws for rental property could trigger the testing process. In addition, states should establish and enforce sanctions for knowing endangerment of persons by lead hazards.

The Sociology and Geography of Mortgage Markets: Reflections on the Financial Crisis

The article presents a symposium discussion assessing the role the sociological and geographical aspects of the mortgage market played in the 2008 financial crisis. Combinations of interrelated causes of the global financial crisis include deregulation and re-regulation, financialization and globalization, and bubbles and wrong incentives. The various ways the mortgage market is shaped and reshaped by both mortgage lenders and state institutions is examined. It is stressed that mortgage loan securitization is largely an invention of government and government erected institutions such as Fannie Mae and Freddie Mac.

Proposals Concerning the Current Financial Crisis

A basic cause of the current financial crisis was the mandate from the U.S. Congress to the Federal National Mortgage Association (Fannie Mae) to increase its support of low-income housing. This mandate led to a lowering of lending standards, which encouraged home buyers to spend beyond their means. The problem was aggravated by novel, obscure, highly leveraged financial instruments that were not well understood by either lenders or borrowers. At least two steps are required for the solution to this crisis: (1) Congress should instruct Fannie Mae that the safety of the financial system must take priority over the objective of providing low-income housing, and (2) this article’s “modest” proposal for bringing transparency to the tangle of financial instruments should be implemented.

From Wall Street to High Street: Going for a Free Lunch?

Opinions are now divided on whether the the Federal National Mortgage Association (or ‘Fannie’) and the Federal Home Loan Mortgage Corporation (or ‘Freddie’) should remain in their present form, putting a lot of taxpayers’money at risk. The bailing–out role now played by the Federal Reserve has been sternly criticised and it has been questioned whether this should be allowed to go on and on in the foreseeable future, transforming US capitalism into social capitalism. The event has also affected the UK capital market, with serious erosion of market capitalisation. But, is the UK home market an innocent bystander in the whole scheme of things? That is is the subject of this article.

Rescuing Failure or Failing to Rescue: Which is the Better Consequence?

This article looks at the origins and future of the US Federal National Mortgage Association and Federal Home Loan Mortgage Corporation, previously believed to be probably as safe as US treasuries given both their previous ties with the State, and how their activities have come to haunt the US economy; the UK capital market, with serious erosion of market capitalisation; and the global financial system.

Government-Sponsored Entities

The U.S. Government9s influence is large in many areas and the financial sector is no exception. This article provides a brief overview of two Government Sponsored Entities (GSEs) that dominate the market for mortgages in the United States: The Federal National Mortgage Association, better known as Fannie Mae (or just Fannie), and the Federal Home Loan Mortgage Corporation, or Freddie Mac (Freddie). Fannie and Freddie are among the largest issuers of any stripe—government or private— and among the most highly visible. To carry out their stated mission to support the housing market, they issue debt to buy mortgages, which they hold in their own portfolios, and they buy mortgages from originators to bundle for sale as mortgage-backed securities (MBS). Together they securitize about half of all mortgages in the United States. <b>TOPICS:</b>MBS and residential mortgage loans, legal and regulatory issues for structured finance

Federal Credit and Insurance Programs: Housing

This paper reviews the evolution of the major credit and insurance programs undertaken by the U.S. government in support of urban housing. As the review makes clear, the Federal Housing Administration (FHA), Veterans Administration, Federal National Mortgage Association, and Federal Home Loan Mortgage Corporation have played major roles in the development of liberal and efficient primary and secondary mortgage markets in the United States. The development of capacity in mortgage lending and securitization in the private sector does suggest, however, that federally subsidizing mortgage market activities can be restrained with little effect on homeownership- the principal goal of this federal activity. In particular, the orderly reduction in the mortgage investment activities of the government-sponsored enterprises (GSEs) and the imposition of guarantee fees on mortgage-backed securities insured by the GSEs are first steps in restraining federal activity. More generally, a concentration of FHA and GSE activity on first-time homebuyers would reduce federal risk exposure while preserving the economic rationale for government activity.

Fussing and Fuming over Fannie and Freddie: How Much Smoke, How Much Fire?

Abstract: The roles of Fannie Mae and Freddie Mac have become increasingly controversial in the modern world of residential mortgage finance. The authors describe the special features of these two companies and their roles in the mortgage markets and then discuss the controversies that surround the companies and offer recommendations for improvements in public policy. JEL classification: G21, G28. Key words: Fannie Mae, Freddie Mac, government-sponsored enterprises, residential mortgages, securitization, regulation The Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation--commonly known as Fannie Mae and Freddie Mac, respectively (1)--have led the way in dramatic changes that have taken place in the structure of the U.S. residential mortgage markets since the 1970s. Fannie Mae and Freddie Mac are quasi-private/quasi-public: for example, they have federal charters that confer unique regulatory provisions; but their shares are publicly traded on the New York Stock Exchange. The biggest advantage of Fannie Mae's and Freddie Mac's anomalous legal status arises because financial markets treat their obligations as if those obligations are backed by the federal government--even though the federal government explicitly does not do so. With the benefit of this special status, Fannie Mae and Freddie Mac have grown into enormous financial institutions, with combined total assets of over $1.8 trillion in 2003. One critic, Richard Carnell (2004), a former Assistant Secretary of the Treasury, has suggested that the two companies' growth is at least partially a consequence of a double game that they play: [They] tell Congress and the news media, 'Don't worry, the government is not on the hook'--and then turn around and tell Wall Street, 'Don't worry, the government really is on the hook.' The preferential legal status of Fannie Mae and Freddie Mac serves as one of a number of mechanisms by which the federal government encourages the consumption (and, arguably, the over-consumption) of housing in the U.S. economy--this one with an on-budget cost of zero. But economists are congenitally suspicious of programs that seem to offer something for nothing. After all, a federal of the deposits in savings and loans cost nothing for many decades--until the early 1990s, when it cost taxpayers about $150 billion (U.S. Federal Deposit Insurance Corporation, 1997). Furthermore, Federal Reserve Chairman Alan Greenspan (2004), among others, has suggested that the anomalous situation of Fannie Mae and Freddie Mac may even pose systemic risks to the financial sector. This article will offer a generalist's guide to the functions that Fannie Mae and Freddie Mac perform in the residential mortgage financial markets and the controversies that swirl around them. Along the way we will highlight some important--and perhaps under-appreciated--changes that are occurring in the structure of U.S. residential mortgage markets. Some Background What Do Fannie Mae and Freddie Mac Do? Fannie Mae and Freddie Mac participate in the secondary mortgage market: Mortgage originators come to them with pools (bundles) of mortgages and either these assets for securities or sell them outright to one of the two companies. Under Fannie Mae's and Freddie Mac's swap programs, an originator exchanges a mortgage pool for a mortgage-backed security that is issued and guaranteed by one of the two companies and that represents an interest in the same pool. Fannie Mae and Freddie Mac promise the security holders that the latter will receive timely payment of interest and principal on the underlying mortgages, less an annual guarantee fee of about 20 basis points (0.20 percent) on the remaining principal. In essence, Fannie Mae and Freddie Mac are providing insurance to holders of mortgage-backed securities against default risk on the underlying mortgages and are thus bearing that risk themselves. …

Emerging Competition and Risk-Taking Incentives at Fannie Mae and Freddie Mac

Abstract: This paper examines two major forces that may soon increase competition in the U.S. secondary conforming mortgage market: (1) the expansion of Federal Home Loan Bank mortgage purchase programs and (2) the adoption of revised risk-based capital requirements for large U.S. banks (Basel II). The authors argue that this competition is likely to reduce the growth and relative importance of Fannie Mae and Freddie Mac and hence their franchise values and effective capital. Such developments could, in turn, lead to more risky behaviors by these two GSEs. It is this last consequence that warrants greater regulatory awareness. JEL classification: G21, G28 Key words: government-sponsored enterprises, mortgages, securitization, risk-based capital, moral hazard, charter value I. Introduction The Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) dominate the U.S. secondary market for conforming singlefamily residential mortgages as both investors in and securitizers of these loans. (1) For example, in 2002, these two government-sponsored enterprises (GSEs) acquired the credit risk on $1.5 trillion in conforming mortgages, or 78 percent of the $1.9 trillion in conforming mortgage originations that year. (2) Such activity over the past decade or so has resulted in Fannie Mae and Freddie Mac becoming the second and fourth largest U.S. companies, respectively, when ranked by total assets as of year-end 2002. As GSEs, Fannie Mae and Freddie Mac have federal charters (3) that include provisions that serve to lower their operating costs directly (e.g., state and local income tax exemptions) as well as create the perception that their obligations have implicit federal backing (due to, among other things, having access to a line of credit with the Treasury). (4) The presence of such federal benefits naturally leads to questions about their purpose, size, and distribution. That is, should the federal government support housing finance through GSEs? and if so, how they should be structured so as to maximize social benefit and minimize taxpayer risk? Indeed, public interest in these issues has recently been heightened in the wake of hedging and accounting travails at Fannie Mae and Freddie Mac (Frame and White, 2004). Like the mortgage interest deduction and a myriad of other governmental policies, Fannie Mae and Freddie Mac are a mechanism by which the federal government encourages the construction and consumption of housing. (5) While such encouragements do provide benefits for households in their roles as buyers and consumers of housing services, these benefits are not free. The encouragements for housing significantly reduce the resources available for and thus impose costs on the other sectors of the economy (e.g., Mills 1987; Taylor 1998). Further, it's unclear that that federal sponsorship of Fannie Mae and Freddie Mac actually has a material impact on homeownership rates (Feldman, 2003). As a result, Calomiris (2001) and White (2003) argue that Fannie Mae and Freddie Mac should be fully privatized and replaced with targeted explicit subsidies for first-time, low- and moderate-income homebuyers. Such subsidies, the authors argue, would be more effective in dealing with the genuine positive externality that accompanies home ownership and would be less distortionary. The size of Fannie Mae's and Freddie Mac's obligations raises questions about the extent of potential taxpayer liability, systemic risk exposure, and the appropriate safety and soundness regulatory regime for GSEs. As of year-end 2002, Fannie Mae had total assets totaling almost $890 billion and net off-balance sheet mortgage guarantees of over $1.0 trillion, while Freddie Mac had about $720 billion in total assets and net off-balance-sheet mortgage guarantees of over $740 billion. (6) Furthermore, both of these enterprises are highly leveraged, with ratios of total equity capital to total assets of 3. …

Discriminating risk: the U.S. mortgage lending industry in the twentieth century

Discriminating Risk: The U.S. Mortgage Lending Industry in the Twentieth Century. Guy Stuart. 248 pages. Cornell University Press, Ithaca, New York, 2003. The title of Guy Stuart's book suggests that it would provide an objective summary of the evolution of the lending decisions of the American mortgage lending industry in the twentieth century. Instead, the primary focus of the book is on the way lenders ''construct risk'' in ways that discriminate against racial and ethnic minorities- namely, blacks and Hispanics. Stuart's book begins with an explanation of his concept of risk construction in which cultural, institutional, and spatial issues affect the lending decision in a manner that discriminates against certain minority groups. He distinguishes [following Keynes (1921) and Knight (1921)] between the concepts of uncertainty and risk by explaining that uncertain decisions are those in which the decision maker is not aware of the probability distribution of future events, whereas risk decisions are made when decision makers attempt to translate uncertainty into risk by evaluating the probability distribution of future events. Cultural, institutional, and spatial issues affect the way lenders construct risk in the face of uncertainty. Without delving into the quagmire of whether lenders engage in blatant discrimination, as implied by the Federal Reserve Bank of Boston study (Munnell, Browne, McEneaney, and Tootell, 1992), Stuart argues that the ways lenders construct risk result in unfair treatment of minority loan applicants. In particular, he suggests that lenders construct risk in an implicit social context that affects the way they receive and process information and thereby develop lending rules. Furthermore, he suggests that the lending guidelines promulgated by the dominant institutions in the mortgage industry [the Federal Housing Administration (FHA), the Federal National Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage Corporation (Freddie Mac)] continue to put minority borrowers at a disadvantage in mortgage lending decisions. Lastly, he argues that the manner in which appraisers and lenders identify and delineate neighborhoods makes the conclusions lenders reach regarding changes in property value a self-fulfilling prophecy. Chapter 1 of the book considers the ''meaning of value'' and the role that appraisers play in the mortgage lending decision. Stuart provides an interesting discussion of the progress made by the appraisal profession (largely at the urging of the Department of Justice) toward reducing explicit racial and ethnic discrimination. He comments on Frederick Babcock's writings in the Federal Housing Administration's Underwriting Manual (1936), used for many years after the FHA's inception under the Roosevelt administration, and concludes (p. 58) that the ''. . . (misguided) genius of Babcock's solution'' that calls for the careful delineation of ''neighborhoods'' from which comparables should be chosen in the sales comparison process created a class and race sensitive appraisal process. Eventually in 1976 the Department of Justice and the American Institute of Real Estate Appraisers and the Society of Real Estate Appraisers agreed to strike all racist-like language from their training materials. The passage of the Home Mortgage Disclosure Act of 1975 and the Community Reinvestment Act of 1977 brought transparency to the lending industry, which helped expose explicit racial discrimination in the lending decision process. Today, the dominant players in the mortgage lending industry explicitly prohibit discrimination against neighborhoods based on the race of the inhabitants. But, Stuart (p. 187) argues, ''. . . the logic of the appraisal process dictates that segregation [continues to] be tacitly acknowledged in the selection of comparable properties.'' Chapter 2, ''Rules for Assessing the Borrower and Managing Behavioral Risk'' considers how loan-to-value (LTV) ratios, debt-to-income ratios, and credit records help lenders construct risk. …

Disability Policy Discrimination Lands Employer in Court

Disability Policy Discrimination Lands Employer in Court

The Value of Federal Sponsorship: The Case of Freddie Mac

The Federal Housing Enterprises Financial Safety and Soundness Act of 1992 attempts to limit the risk borne by the taxpayer due to federal sponsorship of the Federal Home Loan Mortgage Corporation (FHLMC) and the Federal National Mortgage Association by: (1) controlling their range of activities; (2) requiring a level of capital sufficient to absorb substantial losses; and (3) providing a mechanism for closure if capital is insufficient. This article estimates the impact of the capital standards on the value to the FHLMC of federal sponsorship. Although FHLMC's level of capital exceeds requirements, the federal government still bears a nontrivial portion of the FHLMC's risk.