A Study of the GSEs' Single-Family Underwriting Guidelines

Executive Summary

Kenneth Temkin, George Galster, Roberto Quercia, Sheila O'Leary
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Document date: April 01, 1999
Released online: April 01, 1999

The nonpartisan Urban Institute publishes studies, reports, and books on timely topics worthy of public consideration. The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders.

In 1997, the U.S. Department of Housing and Urban Development (HUD) commissioned the Urban Institute to conduct an exploratory study of Fannie Mae and Freddie Mac's single-family underwriting and appraisal guidelines, in response to HUD's statutory responsibility to review and comment on the guidelines. HUD requested that the exploration provide information about the effects government-sponsored enterprises' (GSEs') guidelines have on the funding of loans on properties affordable to lower-income people and in underserved areas, and the impacts automated underwriting and credit scoring technology have on low- to moderate-income and minority borrowers. HUD also requested that this exploration include information about lenders' perceptions about the effects of the GSEs' guidelines on minority mortgage applicants, since minorities' lower average incomes and wealth mean that underwriting guidelines are likely to disqualify higher proportions of minority applicants.


This exploration combines and analyzes information from three sources to assess the potential effects the GSEs' underwriting and appraisal guidelines might have on the issues identified above:

  • previous studies that analyzed the affordability and fair lending effects of the GSEs' guidelines;

  • the GSEs' current underwriting guidelines, including both the standard guidelines used to assess most loan applications and those used in conjunction with special "affordable" programs developed by the GSEs; and

  • in-depth discussions with national key informants and local individuals in four study sites (Boston, Detroit, Miami, and Seattle) who are familiar with the GSEs' guidelines and use them on a daily basis.

While all three sources of data are used in this report, the study's results rely heavily on the third source, the perceptions and opinions of national and local key informants. Thus, the results presented here should be interpreted with care, since the opinions and perceptions of the informants may not be representative of all individuals who work with the GSEs' guidelines. Nonetheless, the results reflect the observations of a group of knowledgeable observers of mortgage markets as of the spring of 1998.


Almost all the informants said their opinion of the GSEs has changed for the better since both Fannie Mae and Freddie Mac made substantive alterations to their guidelines and developed new affordable loan products with more flexible underwriting guidelines. These developments, according to informants, have made it easier for many low- to moderate-income applicants to obtain mortgages. This review of the underwriting guidelines also indicates that the GSEs explicitly prohibit lenders from taking a borrower's race or ethnicity into account in making loan decisions.

Informants did express concerns about some of the GSEs' practices. The GSEs' guidelines, designed to identify creditworthy applicants, are more likely to disqualify borrowers with low incomes, limited wealth, and poor credit histories; applicants with these characteristics are disproportionately minorities. Informants said that some local and regional lenders serve a greater number of creditworthy low- to moderate-income and minority borrowers than the GSEs, using loan products with more flexible underwriting guidelines than those allowed by Fannie Mae or Freddie Mac. These reports may mean that some local and regional primary lenders are using guidelines that are less likely to disqualify minority mortgage applicants and that accurately predict loan performance. This raises the possibility that the GSEs' current guidelines may have a disparate impact on minority borrowers if the guidelines have disproportionate effects on minority borrowers but do not serve a business necessity by accurately predicting loan performance. However, none of the informants provided the evidence necessary to confirm this possibility. A disparate impact finding would have to be based on a detailed analysis of the relationship between underwriting guidelines and loan performance, but none of the informants presented any specific empirical data about the performance of loans issued with underwriting guidelines more flexible than the GSEs'.

Informants also said that using automated underwriting systems and credit scores may place some lower-income loan applicants at a disadvantage, even when they are acceptable credit risks. Finally informants pointed out that, while the GSEs have made changes to their appraisal guidelines, the lack of suitable comparable sales data on inner-city neighborhoods may make it difficult to conduct appraisals of homes purchased by many lower-income and minority borrowers.


In order for HUD to systematically address the concerns raised by the informants, we recommend that HUD (1) develop an enhanced loan-level database that includes loan performance information for mortgages purchased by the GSEs and that is supplemented, to the extent possible, with loan-level performance information on other mortgages within the conforming limit; (2) analyze automated underwriting outcomes with hypothetical mortgage applications that contain information on different types of borrowers; (3) improve current simulation models that estimate the effects of possible GSE guideline changes on various types of borrowers; and (4) improve direct communication mechanisms so that lenders and advocates can raise issues with HUD on an ongoing basis.

These steps would improve HUD's ability to determine whether those GSE guidelines disproportionately affecting minority borrowers serve a business necessity. In addition, the recommended steps would allow HUD to assess the impact automated underwriting systems and underwriters' use of credit scores would have on different types of borrowers, as well as helping the department remain up-to-date on issues of concern to lenders.

The full report, A Study of the GSEs' Single-Family Underwriting Guidelines, by Kenneth Temkin, George Galster, Roberto Quercia, and Sheila O'Leary, is available from HUD.

Topics/Tags: | Housing | Race/Ethnicity/Gender

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