NR 96-56
May 10, 1996
                           Remarks by
  
                        Eugene A. Ludwig
                  Comptroller of the Currency
  
                           Before the
   
                     Fannie Mae Foundation
                   Annual Housing Conference
  
                          May 10, 1996
  
  
  Good morning, and thank you, Jim, for asking me to help you
  open this conference on the future of American cities.  It is
  truly a great pleasure and an honor for me to be here this
  morning.
  
  We're living in an era of significant progress for our urban
  communities and renewed hope for achieving the American dream
  of home ownership.  Fannie Mae -- and particularly Jim Johnson
  -- have played a leading role in making the seemingly
  impossible possible.  I also want to commend Fannie Mae -- as
  well as HUD and the U.S. Conference of Mayors -- for hosting
  this conference today.  It is of critical importance that we
  work together to explore innovative ways to make community
  development loans and extend credit to low and moderate income
  families -- particularly at a time when there is a general and
  genuine willingness on the part of banks to do more in these
  areas.
  
    Sadly, in recent days, we've lost two of this nation's most
  effective, dedicated and inspiring leaders in community
  development and urban reinvestment.  While most Americans had
  never heard of James Rouse and Donald Terner, their passion and
  vision touched their fellow citizens' lives in profound ways. 
  Jim Rouse understood, long before many others, that today's
  metropolitan areas cannot thrive without a vibrant downtown and
  true economic and cultural diversity in their neighborhoods. 
  As one commentator recently observed, "James Rouse helped put
  heart back into the heart of urban America."
  
  And Don Terner, who accompanied Ron Brown on that fateful,
  tragic mission to Bosnia, was a tireless, dynamic and
  inspirational leader who built his Bridge Corporation into the
  nation's largest nonprofit housing organization and believed
  that home ownership could change lives and spark community
  vitality.  Together, they represented the heart and soul of
  urban activism.  Their loss is immeasurable, but their lives
  were -- and remain -- an incredible inspiration.
  
  Today -- because of visionaries and pioneers ... those few who
  make the headlines and the many who toil in obscurity -- urban
  America's pulse is getting stronger with each new day and with
  each new innovation.  Progress is being made because, as Jim
  Rouse reminded us, "the free enterprise business system can
  function for public purpose as well as for profits...."  Only
  initiatives built on the bedrock of solid business principles
  can have a lasting impact on our communities.
  
  This realization -- that underserved individuals and urban
  communities can be profitable business opportunities best
  served by market forces -- continues a historic process that
  I've often referred to as the democratization of credit. 
  History shows that there are almost always opportunities to
  extend credit responsibly to individuals and businesses that
  were not previously served or served effectively.  This
  penchant for experimentation and the financial services
  industry's determination to tap new markets has long proved
  that credit can be extended well beyond what skeptics at any
  given time in our history deemed feasible.
  
  Innovations and evolution in the technology of lending have
  allowed the banking industry to expand gradually its
  understanding of who is creditworthy, making yesterday's under-served tomorrow's core
business customers.  Clearly, banks have
  begun to embrace the low- and moderate-income market with
  increasingly open arms -- laying the foundation for urban
  renewal and developing another generation of bankable
  customers.  These past few years have seen the industry
  accepting new challenges and addressing lingering issues that
  had impeded progress.  
  
  At the Office of the Comptroller of the Currency, we've seen --
  over the last three years -- national bank investment in
  community development operations and projects increase four-fold.  Last year, national banks
made over $400 million in
  community development investments ... investments that
  leveraged over $1 billion in additional private and public
  resources.  Between 1993 and 1995, national banks and their
  community partners invested over $2.5 billion in affordable
  housing units, the majority of which was multi-family housing.
  The realization that this can be good business and good public
  policy has given rise to the tens of billions of dollars of
  commitments we've seen from institutions all over the country.
  
  Perhaps the most impressive evidence of the progress we've seen
  in recent years is reflected in the most current Home Mortgage
  Disclosure Act data.  In 1994, conventional home purchase loans
  to low-income households were up 27 percent from the previous
  year, with loans to African-American families up 55 percent and
  loans to Hispanic-Americans up 42 percent.  That's particularly
  significant at a time when residential mortgage lending overall
  rose only 18 percent.  Further, HMDA figures show a dramatic
  increase in multifamily lending, with national banks and their
  mortgage subsidiaries leading the way as they increased their
  multifamily business 45 percent during this period.
  
  I should also mention that the need for affordable housing is
  as geographically diverse as it is widespread.  While the
  shortage of housing in our nation's cities and rural
  communities is well-documented, one area often overlooked is
  the need for safe and decent housing on Indian reservations. 
  As Native American economies evolve, there is a growing market
  for private sector mortgage loans in these communities.  The
  OCC is developing a guide for national banks that outlines
  unique areas involved in making mortgage loans on reservations,
  such as mortgaging trust land and working through sovereignty
  issues.  Fannie Mae has also been very active in this area with
  the development of a secondary market program for mortgage
  loans made on Native American lands. 
  
  To support these and other types of community development
  initiatives, the OCC recently hired district community
  development specialists in each of our district offices.  These
  specialists will serve as a resource for bankers and their
  community partners as they strive to implement profitable
  community development lending and investment programs.
  
  Yes, working together, we have all made progress in the area. 
  But, continued progress depends upon continuous process
  improvement ... focusing on the nuts and bolts of mortgage
  lending and community development.
  
  What I'm talking about is the day-to-day attention to the
  fundamentals ... refining and perfecting, for example, the
  process by which the industry develops new products,
  underwrites loans, and services a loan obligation throughout
  the life of the loan ... the process of managing properties and
  providing families and businesses effective financial
  counseling ... the process of strengthening existing
  partnerships, adapting to changing realities, and embracing new
  cooperative strategies ... all of which are essential to truly
  move this market into the mainstream and graduate today's new
  customers into a lifetime of expanding opportunities.  
  
  Today, in an effort to advance this process, I'd like to focus
  on a few of the tough areas which I believe require our
  attention and energies.
  
  First, the issue of asset quality.
  
  In the past few months, we have seen some press accounts about
  the asset quality and delinquency rates of affordable mortgage
  loans.  At the OCC, we've also heard these concerns echoed by a
  few banks, particularly involving programs with features such
  as low down payments, high LTVs, high income ratios, and loans
  made without private mortgage insurance. 
  
  In response to these concerns, we asked our examiners to talk
  to several institutions that have been very active in this
  market to assess their experiences and the performance of loans
  in their portfolios.  Most of the banks we talked to have not
  experienced any significant problems and are quite satisfied
  with this area of their businesses.  These banks have developed
  and implemented sound strategies to address the unique concerns
  of affordable housing lending programs.  In certain portfolios,
  however, we found somewhat higher than anticipated delinquency
  rates, particularly with respect to loans that involved the
  layering of several risk factors.
  
  It's important to remember that -- as with any new product or
  credit innovation --  there is a learning curve that must be
  negotiated.  Our examiners' discussions with banks showed there
  clearly are institutions well along that learning curve.  Other
  institutions have more complex situations, either because they
  are recent entrants into this business, or because they are
  further out on the cutting edge of innovation.
  
  It would be a mistake to overreact to these uneven results, but
  it is important to take them seriously and learn from them. 
  Clearly, the responsible course is to acknowledge the problems
  in this area and search for ways to improve how the industry
  originates and underwrites affordable loans.
  
  To that end, we at the OCC are forming an internal working
  group that will look at the risk management strategies in place
  within the industry to address community development lending
  risk -- and in particular to identify the characteristics of
  well-structured, well-managed programs.  We will provide this
  information to national banks in the form of "best practices"
  guidance by the end of the year.  
  
  We also plan to send out an advisory letter that informs
  bankers of the establishment of this informal working group,
  advises them of the uneven asset quality and delinquency
  patterns we have seen in some affordable mortgage portfolios,
  and finally, reiterates that affordable housing loans -- like
  all lending -- must be based on safe and sound banking
  principles.
  
  A second area that requires our energy and attention involves
  enhancing the level of servicing, counseling and community
  engagement necessary for sustainable affordable lending and
  community development.
  
  Mortgage originators have learned that they may have to modify
  traditional underwriting guidelines to be more responsive to
  different types of borrowers.  Likewise, servicers are
  discovering the same thing -- for example, they may have to
  respond differently to late payments from non-traditional
  first-time homebuyers than to late payments from the
  traditional middle-to-upper income suburban homeowner.
  
  In the area of pre-purchase and post-purchase counseling, there
  is general consensus that counseling is necessary to serve
  nontraditional borrowers.  A wide range of activities fall
  under this rubric ... some of it quite extensive and effective,
  some of it merely requiring a borrower to watch a videotape
  before signing on the dotted line.
  
  Gordon Steinbeck, president of MGIC, has discussed the
  importance of giving potential homeowners the information and
  guidance they need early in the process so they can be guided
  to make the best personal decision to fit their economic
  circumstance.  There is a major role for community groups to
  play in providing the cultural bridge between traditional
  banking and the various segments of the unbanked population,
  and ensuring that counseling is customized and appropriate for
  particular groups of borrowers.
  
  Further, the new CRA service test offers greater opportunities
  for banks to provide broader-based community development
  services ... the type of engagement that supports and augments
  the provision of credit.  While not direct lending or
  investment, community development services are often integral
  to sustainable development and the forging of lasting
  relationships between a bank and its community partners.  For
  example, under today's CRA, banks receive service credit for
  activities such as providing technical expertise to nonprofit
  organizations devoted to health services, loaning executives to
  affordable housing organizations, offering school savings
  programs, or making grants to foundations that teach at-risk
  youths entrepreneurial business skills.
  
  This is an acknowledgment that keeping a community economically
  vibrant and strong encompasses many approaches.
  
  Finally, technology is a third area that demands our energy and
  focus.
  
    We can make great strides in making technology a more effective
  tool for serving urban communities and their residents.  We're
  just beginning to scratch the surface of technology's potential
  to make credit -- including, importantly, mortgage credit --
  more accessible and less intimidating.  One example is bringing
  laptop computers into living rooms to originate a home loan, or
  bringing traditional banking services more efficiently to low-
  and moderate-income consumers and neighborhoods.
  
  In Chicago, for instance, the Roseland Christian Ministries has
  introduced its members to the information age using computers
  and software provided through a grant from the Evergreen
  National Bank.  This is part of the bank's strategy to expand
  account relationships and serve the credit and banking needs of
  this urban community.
  
  And we're nowhere near where we can be in deploying technology
  to wring unnecessary costs out of community development
  lending, mortgage lending included.
  
  As we all know, one of the challenges lenders face is scale. 
  Community development loans are typically smaller, and, as a
  result, more costly to make using conventional technology.  New
  technology, however, has a way of driving down per unit costs. 
  With the cost of computing being cut in half every 18 months, I
  believe the costs of loan applications, lending documents, and
  disbursement can all be reduced through technology.  That
  should be a boon for smaller loans.
  
                           Conclusion
  
  I have focused my remarks today on genuine challenges involved
  in community development and affordable home mortgage lending.  
  Progress is not made in this world without facing up to
  challenges.  And it is only by working hard to overcome
  challenges that we have achieved the progress and
  accomplishments we've enjoyed thus far.
  
  But I know I am preaching to the choir.  You know better than I
  do what it takes to tackle tough challenges and win.   You have
  great successes to show for your efforts in this area and you
  have a right to take great pride in them.   And, looking out
  over this audience today, I know that you will confront and
  overcome existing and future challenges.  Your continued
  efforts and successes will continue to make America a better
  place in which to live.
  
  
                             # # #
  
  The OCC charters, regulates and examines approximately 2,800 national banks
  and 70 federal branches and agencies of foreign banks in the U.S.,
  accounting for more than half the nation's banking assets.  Its mission is
  to ensure the safety and soundness of the national banking system.