September 19, 2001

To Mr. Gerard Holder:

In response to your letter of July 11, 2001, Fannie Mae is pleased to provide you with our views on national housing policies that the Seniors Commission may want to consider as you carry out your Congressional mandate. I want to thank you for this opportunity to comment on the Commission's work. The following document provides you with a variety of policy proposals and perspectives that we hope will aid in the task you have before you.

First, let me give you two perspectives from which Fannie Mae views the issues under consideration - that of partner to many in the housing industry across this country and that of significant participant in the capital markets. Fannie Mae is a private company with a public mission. Congress chartered Fannie Mae as an instrument of federal housing policy and we take our public purposes very seriously. Fannie Mae's mission is to tear down barriers, lower costs, and increase the opportunities for homeownership and affordable rental housing for all Americans.

We try to achieve this mission by linking single-family and multifamily lenders to the lower cost financing available in international capital markets, by providing liquidity to these same lenders for their mortgage products, and by managing interest rate risk and credit risk for the housing finance sector. Through our partnerships with lenders, we have a presence in nearly every community in America. Through the work of the Company's 600-person strong Housing and Community Development (HCD) division, Fannie Mae has accumulated significant expertise and experience with housing and community development programs at the federal, state, and local levels. Through our wide array of local partnerships and products tailored to address different local circumstances, Fannie Mae's different business units have at one time or another interfaced with the many delivery systems of housing assistance and the vehicles of housing policy. We interact with a robust and varied delivery system for housing finance. While there are many ways in which it can be improved, our nation's housing system reflects an enormous commitment to affordable housing in this country.

To sustain this commitment to affordable housing, the housing system will require substantial capital in the years to come. The market we serve - mortgage debt - is going to continue to boom as a result of several factors - strong population growth and household formation, rising homeownership rates and home values, and increased consumer use of home equity wealth. Current estimates are that the demand for investment in residential real estate will more than double by 2010, growing faster than the nineties and much faster than the whole economy. During this same time period, the population of Seniors over 65 years old will grow to 40 million and demand a huge share of this investment in residential real estate. And the number of Seniors over age 65 is expected to double by 2030 to nearly 70 million. As Seniors age, their lifestyle and need for assistance change dramatically, and housing options must change to meet these needs. This raises a series of very important questions for consideration by the Commission: Where will all of the capital required to meet this need come from? And, how will the country ensure the availability of low-cost capital to keep housing affordable to this aging population?

As you consider these and other important questions before you, it may be helpful to consider establishing a set of principles to evaluate the many proposals that you will receive for improving the nation's affordable housing efforts. We have taken the liberty of suggesting such principles. We also make a series of more specific policy recommendations for consideration by the Commission in the areas of enabling seniors to age in place and expanding affordable rental housing opportunities.

Fannie Mae is a mission-driven company. In 1994, Fannie Mae announced the Trillion Dollar Commitment - a 7-year pledge to expand markets by investing $1 trillion dollars and serve 10 million targeted households. By the end of 1999, Fannie Mae had invested more than $954 billion, serving 10.6 million targeted families. We reached the goal of investing $1 trillion in April 2000 - 8 months early. Building on this success, Fannie Mae has pledged to provide $2 trillion in housing finance to 18 million underserved families over the next 10 years via its American Dream Commitment. While this commitment has set big targets, its impact resonates in many significant ways. The Opportunity for All Strategy, for example, of this 6-point plan will increase the homeownership rates of and housing support to targeted groups, including, Seniors, urban and rural dwellers among others.

Fannie Mae provides funding to support both affordable home ownership and rental units for Seniors. Our financing vehicles assist households with housing needs to become either well-housed renters or homeowners. Our objective is to provide diverse housing and rental options that meet varying needs of Seniors across a range of income levels and interests.

Single Family business

In the course of our business, Fannie Mae serves large numbers of elderly households. Through July of this year, Fannie Mae has already served over 332,000 Seniors (over age 55) by financing $40 billion in home mortgages. $14 billion of this amount represented new home purchases, the balance came in the form of Seniors refinancing their mortgages to take advantage of favorable interest terms. In 2000, we served 292,000 Seniors, financing $31 billion in home mortgages of which $19 billion represented new home purchases. Our lender partners recognize the importance of serving these individuals, and work with us to meet the borrowers' needs.

Housing and Community Development (HCD)

Fannie Mae's Housing and Community Development Division aggressively initiates products and programs that push the bar on traditional housing finance. HCD helps Fannie Mae achieve its American Dream Commitment by developing targeted products, services, investments, and local initiatives that expand the dream of homeownership and affordable rental housing to underserved populations and communities in need.

HCD's products and initiatives focus on enabling underserved populations -- including minorities, low-income individuals and Seniors -- to obtain affordable housing by creating alternative underwriting standards to meet the unique needs of these citizens. The MyCommunityMortgage product provides a suite of flexible mortgage options for low- and moderate-income borrowers of one- to four-family homes featuring lower credit and downpayment options. Several HCD products even offer 100% financing for homebuyers who lack the resources to come up with a downpayment.

Beginning with the Trillion Dollar Commitment, Fannie Mae has had a strong commitment to affordable housing product innovation. One of the initiatives in the Trillion Dollar Commitment was an "innovations for change" challenge to create at least ten new mortgage finance products. We surpassed that mark in 1998 and still haven't stopped innovating. And the product landscape has changed. Under the American Dream Commitment, Fannie Mae will continue its emphasis on product innovations with a special emphasis on new mortgage products to serve the housing needs of our country's aging population.

America's senior citizens have specific housing finance needs that reflect their unique station in life. Seniors want the financial stability to use the equity in their homes, to move to smaller homes, or to rehabilitate their homes so they can age in place. To address those needs, HCD has embarked on a ten-year effort to help secure the financial future of America's Seniors. Through a $100 million fund for housing finance initiatives, Fannie Mae is developing products and services that specifically target the housing finance needs of America's older citizens.

Reverse mortgages

Our reverse mortgage product is an example of this product innovation. Reverse mortgages enable Seniors who choose to age in place to draw on the equity in their home for use as income, to cover needed medical or home healthcare costs, or for other purposes they deem necessary. Our Single Family business financed $316 million through July 2001 (year to date) in reverse mortgages. Seniors can find peace of mind and security if they are able to draw upon their greatest financial asset, their existing home equity, to provide additional funds as needed for as long as they choose to live in their home.

Relying primarily on our HomeKeeper product and the U.S. Department of Housing and Urban Development's Home Equity Conversion Mortgage (HECM) product, Fannie Mae has provided access to home equity for more than 6,500 Seniors nationwide in 2001 alone. Fannie Mae believes that reverse mortgages provide a valuable financing alternative for homeowners age 62 and older who wish to remain in their homes, but who need the equity tied up in those homes. Reverse mortgages need not be repaid until the borrower moves, sells or refinances the property, or dies. Fannie Mae and the FHA insure the lender against the risk that proceeds from the sale of the property may not be sufficient to pay off the mortgage balance.

In addition to the reverse mortgage product, we have ongoing product development including efforts focusing on home improvement, maintenance, and rehabilitation. Our product development teams are spearheading housing finance options that enable Seniors to age comfortably and securely in their homes, avoiding when possible the excessive costs of over-housing in nursing facilities that diminish Seniors' independence. We recognize the interplay of housing and healthcare for our aging population and are committed to helping ease the financial worries of Seniors by creating products that ensure sound, quality housing. We are continuously looking at creative financing vehicles that can improve the self-sufficiency and overall quality of life for Seniors.

Multifamily Business

Fannie Mae's Multifamily business offers financing for a variety of Seniors housing options, ranging from independent living to service-enriched properties, including congregate care and assisted living facilities. The varied products provide financing for apartments with a menu of services ranging from daily meals to assistance with personal care.

Our Multifamily business also invests in new construction, maintenance, and renovation of America's rental housing. We work with many partners, including lenders, investment bankers, syndicators, developers, property owners, property managers, nonprofit organizations, foundations, and federal, state, and local governments.

Assisted Living and Congregate Care facilities

In spite of the stated preference to remain in their homes, many Seniors require a greater level of care and assistance as they grow older. To provide this care and assistance, various types of housing options have evolved around different levels of care for Seniors. Our Multifamily business provides financing for owners and operators of Assisted Living and Congregate Care facilities.

Beginning with a $300 million pilot fund in 1995, our multi-family Seniors product has grown to a $1.3 billion portfolio. In 2000, we financed 42 loans totalling $457 million. This total grew substantially in 2001. As of July, we had provided funding for 45 loans totalling $450 million. These investments have been well dispersed across 31 states and the District of Columbia. 27% of the facilities in our portfolio are Assisted Living, 27% are pure Congregate Care, and 45% are Congregate Care facilities that also provide Assisted Living.

Low income housing tax credits (LIHTC) for affordable rental units

Fannie Mae's multi-family division finances affordable Seniors rental housing across the country, in addition to funding provided for assisted living communities. Using low income housing tax credits, Fannie Mae in partnership with various public and private sector entities has provided over $836 million in equity funding for affordable rental units as of July 2001. Many of these state-allocated tax credits target age-restricted communities that provide affordable rental options for Seniors.

Fannie Mae is the nation's largest investor in low-income housing tax credit (LIHTC) equity investments with more than $1.3 billion committed in 2000, 30 percent higher than 1999, for a total of $4 billion total commitments outstanding as of fiscal year 2000. Renters who benefit from LIHTC are at 60 percent or below of area median income. We preserve America's rental housing for low- and moderate-income families and Seniors by designing flexible products and providing favorable underwriting terms, including refinancing and permanent financing of new construction or rehabilitation properties.

In the past year, Fannie Mae's Multifamily division has financed numerous rental facilities for Seniors, including: the St. Paul Senior Living Apartments in Capitol Heights, MD; Gateway Village apartments in Salisbury, MD; Capistrano Pines Apartments in Henderson, NV; Hogue Manor, a hotel in downtown Linton, ND renovated into a Seniors housing complex; and Central Court Village which provides affordable rental units for Seniors in Billings, MT. These facilities represent one way in which Fannie Mae is actively seeking to provide housing options for this growing group of consumers.

Fannie Mae is the largest private sector investor in multi-family mortgage lending. And it is no coincidence that 90 percent of our existing $65 billion portfolio consists of affordable products. Our ability to make capital available through all types of economic conditions has helped to promote interest rate and rent stability, keeping properties affordable for many low- to moderate- income renters. The end result is stronger, more stable communities that meet the varying needs of homeowners and renters.

Principles for Approaching Housing Policy

In evaluating competing policy options for addressing the outstanding housing needs, Fannie Mae recommends that the Seniors Commission adopt the following principles:

• Bolster State and Local Flexibility. Housing and community development needs vary considerably from place to place. Likewise, the solutions to these types of problems will derive from a complex matrix of local institutions, programs, and laws. The federal government plays a vital role in solving these problems. We believe the federal role works best if it provides guiding principles but preserves local flexibility to tailor the ultimate solutions.

• Support a Mix of Strategies. The debate around the allocation of federal resources for housing has often broken down into a debate over the relative merits of new housing production versus rehabilitation of the existing inventory. Encouraging the continued supply of new housing is an important component of any strategy as these new units provide safe, secure housing as well as a wealth of lifestyle offerings. The Commission would also be well served to develop rehabilitation programs for local neighborhoods that encourage Seniors who are willing to age in place. Varying market conditions argue for providing tools and resources for a variety of strategies and the flexibility for communities to utilize the different tools based on those local market conditions and needs.

• Encourage Choice. The appropriate mix of policies should work to assist households with housing needs throughout various life stages and lifestyle choices. The needs of Seniors change over time based on their physical (and mental) capability, availability of adult children living nearby, and marital status. In its deliberations, the Commission should consider policy proposals that maximize housing choices, including opportunities to attain various types of homeownership ranging from aging-in-place, to active adult communities, to Assisted Living and Continuing Care Retirement Communities (CCRC).

• Focus on Cost Reduction Strategies. In a constrained resource environment, strategies to reduce costs and create efficiencies can have the effect of expanding available resources. Federal housing and healthcare programs at times suffer from excessive regulatory and administrative burdens that increase program costs. The impact of federal programs could go further by reducing the complexity of affordable housing transactions with multiple subsidies, and by working to align program rules and regulations across various programs with similar objectives. The Commission should urge HUD to work with other federal, state, and local agencies to reduce unnecessary regulations that drive up the cost of housing and waste scarce subsidy dollars.

• Invest in Effective Programs. Several existing federal programs that Congress has already enacted are very effective. The Commission should recommend that the Congress increase the resources for effective programs like the Low-Income Housing Tax Credit, private activity housing bonds, the HOME program, and the Section 8 voucher program. These programs encourage public/private partnerships, use market incentives, provide for state and local flexibility, and serve to meet the outstanding needs. While Congress and the Administration could make improvements in all of these programs, providing additional resources would be money well spent. Further, the interrelation of housing and healthcare provides a growing challenge as the population ages, requiring seamless coordination of agencies such as Health and Human Services with housing agencies. Such coordination will serve to enable Seniors to remain in their homes without sacrificing needed services. In addition to improving the quality of life for Seniors, the Commission should weigh the added benefits that retaining homeownership can bring to household wealth and neighborhood stability.

• Do No Harm. The Commission should take a strong stand in opposition to those who would argue that the nation invests too much in housing. So long as millions of Americans face significant rent burdens and many millions more have not yet achieved the dream of homeownership, placing a high priority on housing investment is sound. The Commission should apply the following, straight-forward questions to any proposals for changes to the housing finance system as well as the housing assistance delivery system: Do the proposals reduce costs for consumers? Do they improve the safety and soundness of the housing finance system? Do they expand opportunities for homeownership or affordable rental housing? Do they allow innovation in the market without cumbersome regulatory requirements? Proposals that reduce competition, drive up the cost of housing, or undermine efforts to increase affordable housing opportunity are contrary to the work of the Commission.

III.  Increasing Private Sector Participation and Investment

The private market cannot solve the remaining housing needs alone. The public sector can provide subsidies and take risks that would otherwise constrain a private sector entity. Effective use of public subsidy dollars can leverage private investment and bring more resources to bear in addressing housing problems. Competition and market incentives can play a valuable role in creating efficiencies in service delivery and in reducing costs to consumers. Effective program delivery should strive to engender public-private partnerships that build on the strengths of each sector.

The focus should be on those national and local community-based non-profits and other private sector entities that understand the unique challenges facing their communities across the country. Recognizing specific challenges faced by various communities of Seniors and aligning with those entities best suited to address these particular needs is essential. Unfortunately, there is not likely to be a one-size-fits-all solution to the complex dilemma of housing and health care for an aging America. Focusing on those organizations with resources that stand to benefit from financing programs that aid Seniors at home (e.g., by reducing costs, minimizing in-patient hospital stays, and other potentially burdensome and inconvenient medical expenses) is an important aspect of private sector partnerships. Minimizing the administrative burden of working with public sector entities can also help increase private partner involvement.

IV.  Policy Proposals

Cornerstone Programs that Work

Congress has enacted several major programs that appear to have withstood the tests of time and are doing a good job of addressing the nation's outstanding housing needs. The Low-Income Housing Tax Credit (LIHTC), the HOME Investment Partnership program (HOME), multifamily housing bonds (MFHBs) and Mortgage Revenue Bonds (MRBs), and the Section 8 housing voucher program can each work alone to meet certain housing needs or can work together to target assistance to the very poor and the hard to house.

These programs should form the foundation the nation's housing policy Fannie Mae strongly recommends that the Commission make a statement in support of these programs and the role that these programs play in serving the housing needs of Seniors. Unfortunately, the achievements of these programs are not well understood by policy makers and the public. The Commission could strengthen the housing system by providing a strong endorsement of successes of these programs. Expanding the resources for each of these programs would go a long way toward meeting the outstanding housing needs in this country.

The LIHTC has evolved into a very effective vehicle for affordable housing production. State agencies generally manage the credit allocations well and do an effective job of administering the program. In the instances where developments require gap funds, state and local governments allocate funds made available through the HOME program. HOME also has the flexibility to allow state and local governments to support rehabilitation, homeownership assistance, and other forms of housing assistance where modest amounts of subsidy are required. Likewise, MFHBs used in conjunction with tax credits or alone, are a valuable source of low-interest debt financing that serves to make rental housing more affordable by lowering debt service costs.

The Section 8 voucher program provides an income supplement to low-income Seniors to allow them to afford the units at rents that can support the tax credit projects. Section 8 vouchers work very well to provide housing opportunities to very low-income households, providing these households with increased buying power to rent privately-owned units in the open market.

The combination of the LIHTC, HOME, private activity housing bonds, and Section 8 vouchers should form the core of the strategy to address the nation's toughest remaining housing problems. Clearly, all four programs could benefit from modest changes to increase efficiencies and make them easier to use in tandem.

The strong role of the states in delivering this basic program structure suggests that this delivery system should work to address the housing needs of rural areas. However, the Commission will want to consider the extent to which the public sector should advance and strengthen a parallel system dedicated to rural housing needs.

With respect to populations with special needs including Seniors, Fannie Mae would recommend that the Commission strongly urge that the federal government take steps to increase the responsibilities of federal social service agencies like Health and Human Services (HHS) to meet the service needs of residents in affordable housing, while at the same time reducing the use of scarce affordable housing subsidies to pay for service programs.

As illustrated in Table I, Fannie Mae would further recommend that the Commission adopt the same range of tools - investor tax credits, flexible gap funds, low-interest debt, consumer-based assistance, and service dollars where needed - to address homeownership needs. Some pieces of the structure are already in place: MRBs and the HOME program are already making significant contributions to affordable homeownership opportunities, and HUD is implementing new authority for Section 8 homeownership vouchers. The enactment of a single-family housing tax credit similar to the one proposed by the Bush Administration for the production of affordable homeownership housing would create a complete and parallel structure.

TABLE I
Strategies for Affordable Housing

Other Specific New Policy Proposals

Based on Fannie Mae's experience working in communities with a wide range of affordable housing and community development challenges, as well as the experience of our Seniors housing partners, we believe that the following proposals would strengthen the country's efforts to increase appropriate homeownership and affordable rental housing opportunities for Seniors:

Expanding Options that Enable Aging-in-Place

• Tighter integration of federal housing and healthcare agencies. Serving an aging population requires both housing and healthcare services to operate effectively, efficiently and at the lowest possible cost. Ability to age in place is dependent upon home healthcare options as well as affordable home maintenance. Bridging the divide between Health and Human Services and federal housing agencies is an integral part of managing this challenge, with the objective of marriage of these federal programs at the community level.

• Partnerships with non-profits and private sector home healthcare agencies. In addition to financing home health needs, state and federal agencies will need to be involved in regulating providers. Care must be taken to ensure the well-being of the aging members of our population. State and federal agencies will need private sector partners to provide and finance home-based assistance.

• Combined social and private long-term care insurance. Longer life expectancies and an increase in chronic and disabling conditions will likely increase public pressure to meet long-term care needs. While many of today's Seniors cannot afford long-term care insurance, some combination of public and private insurance is needed to ensure the welfare of Seniors who choose to age in their homes.

• Affordable home maintenance strategies. Aging Americans face growing expenses in both healthcare and home maintenance. Creative strategies are needed to eliminate the costly home maintenance burden on these individuals. Financing strategies are needed that provide fixed, manageable home maintenance expenses.

• Expansion of public assistance to provide ongoing care for Seniors in their homes. Medicare currently provides modest funding, and Medicaid has stringent financial eligibility that requires an individual to exhaust their assets and income to qualify for assistance. Consequently, there is a growing need for public assistance to provide ongoing care that supports and encourages independence among aging individuals who prefer to age in place.

Expanding Affordable Rental Housing Opportunities.

• Risk-Sharing Pilots for Small Multifamily and Single-Family Rental. Housing policy should place greater emphasis on the small rental property inventory, much of which is inhabited by Seniors in our central cities. This inventory provides the majority of affordable rental housing opportunities in this country. FHA risk-sharing pilots could increase lender and secondary market participation and advance understanding about the financing needs of this stock.

• Simplify Subsidy Layering. Affordable Seniors housing developments often require multiple partners and subsidy sources. These structures add complexity and cost. At the same time, other rules inhibit the provision of both debt and equity resources by the same investor in tax credit properties. The Commission could greatly enhance efficiencies in affordable Seniors housing production by focusing on ways to improve the ability of different subsidy programs to work together.

• Section 236 and Risk-Sharing. HUD policies that prohibit the combination of its multifamily risk-sharing program and Section 236 properties undermine opportunities to preserve some of the older affordable housing stock which house large numbers of Seniors.

• Tax Credit Property Transfers. The IRS requires an LIHTC property owner to purchase an insurance company bond at a significant premium to cover the compliance risk for the remainder of the 15-year term when the existing owner transfers the LIHTC property to a new owner. Eliminating the bonding requirement could allow some current owners to self-insure and save transaction costs.

• Better Market Information. The public sector could greatly improve market efficiency and market participation in affordable Senior housing lending and investment by collecting and disseminating aggregated key statistics on multifamily markets.

V.  Conclusions

This letter has suggested a policy framework and a series of policy proposals to further the national housing goal of providing decent, safe, and affordable homes for Seniors. Fannie Mae hopes that this letter has provided useful policy ideas and insights that will help shape the Seniors Commission's work. Our employees are also available to provide you with their insights and expertise.

As the country continues to make progress toward our national housing goals, the remaining housing needs become more complicated and intractable. Solving these problems will require public resources. At the same time, the private sector can bring expertise, additional resources, and operational efficiencies to bear in helping to tackle these housing problems. The best policy environment includes one where the public sector continues to build on effective partnerships with the for-profit and the not-for-profit communities. A strong, effective public sector role in the provision of resources, in sharing risks, and in lowering the costs of regulations is essential for success.

The task you have before you is daunting. We hope that the discussion and recommendations in this document add value to your deliberations and provide you with practical and pragmatic advice. Fannie Mae stands ready to assist you in your task in any way we can.