In a radical change in philosophy, Freddie Mac has launched several pilot programs over the last few weeks to serve the low and moderate-income housing markets.

Normally, the secondary market giant prefers to address affordable housing issues through regular channels as part of its everyday book-of-business. But now, the company seems to be saying that targeted, more specialized efforts are needed to dig deeper.

That's the tact taken by its larger rival, Fannie Mae. Both companies are federally-chartered financial institutions that were created to keep mortgage money flowing to all corners of the country. They do that by purchasing loans from local lenders and packaging them into securities for sale around the world.

Among Freddie Mac's new experimental programs are an initiative designed to make it easier for families with excessive debt and impaired credit to become eligible for a market rate loan faster than would otherwise be possible, support new home construction is urban settings and back the construction or rehabilitation of apartments.

The $100 million pilot to help families repair their credit problems is a joint effort with the National Foundation for Credit Counseling and 18 of its member-agencies, many of which trade under the name Consumer Credit Counseling Service. Participating lenders include Bank of America Mortgage, Chase Manhattan Mortgage and Norwest Mortgage.

Under the "CreditWorks" program, potential borrowers must participate in a debt management plan offered through the agencies for at least 18 months. Then, if they have made timely payments on their existing debt through the plan during that period and participated in home buyer counseling, they can qualify for a mortgage at market rate.

Without CreditWorks, people with credit issues would sometimes have to spend several years rebuilding their credit. The only other alternative would be to try to obtain a mortgage in the subprime sector at an excessive interest rates.

To support urban development, Freddie Mac is testing two innovative products, also to the tune of $100 million. One will, for the first time, allow builders to cover the buyer's downpayment, up to 3 percent of the loan amount. The second will provide contractors willing to work in these more difficult markets with a financial safety net in case they are unable to sell their homes after a reasonable period.

The products complement the "Building Homes in America's Cities" initiative sponsored by the National Association of Home Builders, the U.S. Conference of Mayors and the Department of Housing and Urban Development. The program calls for the construction of one million houses over the next 10 years.

NAHB President Robert Mitchell hailed the commitment, particularly the creation of a fail-safe mechanism to protect builders willing to take a gamble on what are often tough-to-sell locations. The joint NAHB-HUD-Mayors initiative is active in 14 cities, but Freddie Mac will test its new wrinkles in only five Baltimore, Cincinnati, Sacramento, San Antonio and Washington.

To support affordable multi-family housing, the company is making forward commitments to builders and renovators that lock-in interest rates before construction begins, thereby eliminating the risk that their costs will be higher before they can bring their units to market.

The pilot is open to apartment owners and contractors who are financing multi-family properties that are funded in part or entirely with low-income housing tax credits or tax-exempt bonds.

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Published: February 11, 2000

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