This article is from the August 2002 issue of The Washingtonian.
Fannie Mae Projects a Happy Image. But as Its Debt Grows Bigger and Its Executives Get Richer, Should Taxpayers Start to Worry?
By Ross Guberman
Congressman Christopher Shays was lying in bed one night last March and told his wife he was about to take on a new battle. He said the Enron scandal had gotten him thinking about Fannie Mae and Freddie Mac, the two government-chartered housing-finance corporations. They were the only Fortune 500 companies that didn't have to tell the public about their financial condition. He had mentioned the problem to a couple of staffers and allies on the House Committee on Financial Services.
The next morning, before he talked to anyone else, his office got a call from Duane Duncan, Fannie Mae's chief lobbyist. Duncan said he'd heard about Shays's comments and wanted to set up a meeting with Frank Raines, the head of Fannie Mae. He wondered if Shays "liked" Raines enough for such a meeting to be fruitful.
Another lobbyist approached Shays and said, "You're making a lot of people unhappy with this."
Shays, a Republican from Connecticut, knew Fannie's antennae stretched all over town, but he never expected that a few stray remarks would trigger such a reaction. Figuring he was on to something, Shays teamed up with Edward Markey, a Massachusetts Democrat, on a bill to apply the government's disclosure rules to Fannie Mae and Freddie Mac.
"The more I look," Shays says, "the more convinced I am that they're not eager to disclose what they do. They're wonderful organizations, but they're trying to protect a privilege that could ultimately be destructive to them."
Shays broke a political rule in Washington: Don't mess with Fannie Mae. Wealthier than most nations, Fannie Mae is known to try to devour anyone who crosses it. That's fine with Fannie Mae's supporters, who say it has helped millions fulfill the dream of homeownership by combining public spirit and private innovation. Critics contend that Fannie Mae's public face of heartwarming largess masks plenty of private greed. Fannie, they claim, is a company with the lowliest of missions: to juggle politicking and public relations so that its blend of subsidies and privileges remains intact.
Months of interviews with Fannie Mae executives, employees, and customers--as well as analysts, public officials, advocacy groups, and others--help explain why people become so impassioned when they look into Washington's largest shareholder-owned company. No one denies that Fannie provides benefits to homebuyers--the battle is over whether these benefits are worth the cost.
A creature of Franklin Roosevelt's New Deal, Fannie Mae was born as the Federal National Mortgage Association. In an era of unemployment and foreclosures, FDR's brainchild provided local banks and thrifts with money needed to finance home mortgages. Almost 70 years later, Fannie Mae is one of the world's biggest financial-service companies. Eight trillion dollars pass through its coffers yearly.
In 1968, Lyndon Johnson, looking to spin the agency off the government's budget, converted it into a public-private hybrid called a "government-sponsored enterprise." Today Fannie Mae operates under a congressional charter but also generates profits for outsiders who hold more than $70 billion of its stock. In the past two years, as investments in high-tech and many other sectors of the economy have plummeted, Fannie's stock has gone from $50 a share to more than $70. Its earnings are expected to go from about $6.15 a share this year to almost $7 next year.
Fannie Mae's sole competitor, Freddie Mac, was created in 1970 so Fannie Mae wouldn't monopolize mortgage buying. In practice, they march in lockstep on Wall Street and Capitol Hill. Freddie has remained smaller and quieter, and its stock also has performed well. Since mid-2000, the share price has increased from $40 to more than $60, giving Freddie a market capitalization of about $40 billion.
At Fannie Mae's helm is another FDR--Franklin Delano Raines. A Harvard-educated Rhodes Scholar, a Bill Clinton budget chief, and the first African-American chief executive of a Fortune 500 company, Raines was considered a possible running mate for Al Gore in 2000.
Fannie Mae's headquarters, on Wisconsin Avenue above Georgetown, are modeled after the Governor's Mansion in Colonial Williamsburg. They recall a manor house; limousines wait in a cobblestone circular driveway. Walking past electronic card readers, thousands of employees fill the company's three labyrinthine buildings. A trading pen, complete with earphones and ticker tape, adds a touch of Wall Street to the mix.
Fannie Mae has made the "best places to work" lists of Working Mother and The Washingtonian. Employees enjoy weight-loss classes, concierge service, and on-site catering and emergency child care. Retention of women and minorities is high. Although the company retains ties to the government, the pay scale isn't among them: Raines made about $15 million last year in compensation and stock options. One of his predecessors received a $27-million severance package.
For Fannie Mae's rank and file, morale is as strong as the salaries and benefits. Employees suggest the good cheer comes from knowing that their spreadsheets help move people into homes of their own.
As much as Fannie Mae's advertisements feature youngsters chasing puppies in front of freshly painted Colonial homes, the company has never loaned anyone money to buy a house. By law, Fannie Mae and Freddie Mac buy only loans made by banks or other lenders.
Say you get a 30-year mortgage from Chase Manhattan. Chase will sell the mortgage to Fannie and agree to send Fannie your payments. At that point, Fannie has two choices. It can keep the mortgage, profiting from the difference between the interest rate on your mortgage and the rate it paid when borrowing the money from international investors to buy the loan. Or, if the lender has bundled your loan with others, Fannie will issue an investment product called a mortgage-backed security. Those who buy the security will pay Fannie a fee for guaranteeing that they'll receive all your payments even if you prepay your loan, refinance, or default.
These transactions, known as the secondary-mortgage market, have helped make home loans a good investment. Thanks to them, Fannie bought or guaranteed $600 billion in mortgages last year and made $6 billion in profits.
Fannie Mae keeps mortgage funds flowing. Although today's financial markets could handle that job, the company's ability to borrow trillions cheaply helps it finance loans Americans like most: 30-year, fixed-rate mortgages with low down payments.
Fannie Mae also has worked to streamline how you get a mortgage. It developed what it calls DeskTop Underwriter to eliminate paperwork, appraise property values, and tell you quickly whether you qualify. Raines says such innovations can save home buyers as much as $1,000.
The biggest plus: Fannie lowers mortgage rates. If you turn to the mortgage columns in the newspaper, the "conforming" mortgages on the left--the ones Fannie and Freddie can buy--are typically a quarter of a percent cheaper than the "jumbo" loans on the right (this year, loans for more than $300,700). For the average loan Fannie buys--a mortgage of $118,000--that reduction saves about $19 a month.
"It's something of a miracle from a public-policy standpoint," says CEO Frank Raines, reflecting on his company as he sits at a conference table near Fannie Mae's executive suites.
The miracle didn't fall from the sky. As one government official puts it, the company shouldn't congratulate itself for winning a race that it started a mile ahead.
During a congressional hearing last year, Fannie Mae's chief financial officer, Tim Howard, was asked whether Fannie enjoyed "special benefits" over the rest of the housing-finance industry.
"I think that's a complicated subject," Howard said. Told by a congressman that the answer was "almost arrogant," he conceded, "We are given different opportunities from those which our competition's been given."
There's a reason Howard waffled: The government fuels much of what Fannie and Freddie do. Take the companies' low borrowing costs, which allow them to shave that quarter of a percent off your mortgage. Why do investors charge Fannie and Freddie such low rates for their bonds?