Fannie Mae Before the Meltdown: The View from August 2002

Six years ago, a Washingtonian story issued an early warning about Fannie Mae.

This article is from the August 2002 issue of The Washingtonian. 

Balancing Act

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?

It's not that the companies are famously well managed. It's that investors are sure they'll be repaid--if by no one else, by the US government. Uncle Sam would never let Fannie and Freddie default on more than a trillion in bonds, the thinking goes, because the government created them in the first place.

That means if housing prices crash or either company stumbles, the taxpayers could be on the hook for hundreds of billions. It's as if the public had cosigned Fannie and Freddie's debt, says Lawrence White, a New York University business-school professor and former Freddie Mac director. To pay for a very small cut in mortgage rates, White says, the taxpayers bear the risk of a massive bailout.

The government has come to Fannie's rescue before: Fannie lost $1 million a day during the early 1980s, requiring tax relief and other interventions. A few years later, taxpayers bailed out the Farm Credit System, a government-sponsored enterprise for agricultural loans. Together, Fannie Mae and Freddie Mac have a trillion and a half dollars in assets--more than the gross domestic product of every country but Japan, Germany, and the United States. Their combined debt--also measured in the trillions--is poised to outpace that of the US government. Says Republican Representative Richard Baker of Louisiana, who chairs the House subcommittee overseeing Fannie and Freddie: "The taxpayers are living under an enormous rock suspended by a single rope. Once it breaks, there's no recovery."

Some observers think the rope is fraying. Earlier this year, the Wall Street Journal editorial board likened Fannie and Freddie to failed energy trader Enron, attacking the two companies' exploding debt and "terrible" financial disclosure. The Economist called Fannie and Freddie "arguably the most worrying concentrations of risk in the global financial system."

A Fannie Mae executive insists the risk of a taxpayer bailout is "so remote as to be unquantifiable." Why? The government created the Office of Federal Housing Enterprise Oversight solely to keep Fannie and Freddie out of trouble; mortgages are relatively safe assets; nationwide, the price of homes hasn't gone down in decades; and no one beats Fannie and Freddie in managing interest-rate fluctuations or defaults.

Fine, say critics, but Fannie would not be the first giant to claim invincibility, only to collapse. That's an even bigger worry, they say, because the more Fannie grows, the louder it complains that any attempt to cut its ties with the government is a "tax on homeownership."

Take Fannie Mae and Freddie Mac's right to borrow $2.25 billion from the Treasury. That's hardly enough to salvage a trillion-dollar company, but the line of credit is seen as a symbol of the government's "commitment" to Fannie Mae and Freddie Mac.

It's a powerful symbol. Two years ago, when Gary Gensler, a top Clinton Treasury official, supported taking the right away, Fannie Mae CFO Tim Howard called him "irresponsible" and "antihousing." A Fannie Mae spokesperson said the fallout from Gensler's remarks would prevent 206,000 Americans from buying a home that year.

Rick Carnell, also a top Clinton Treasury official at the time, wasn't surprised by the fury. Years before, when he was drafting legislation as a banking-committee staffer, Fannie tried to get him to include language suggesting that the government backed its debt while it denied the same to the public. He refused.

"Someone should pounce on Fannie's double talk," he says. "Fannie tells Congress, 'Don't worry, Uncle Sam is not on the hook.' Then it turns around and tells Wall Street, 'Don't worry, Uncle Sam really is on the hook.' "

Another of the government's gifts to Fannie Mae has caused controversy: It doesn't have to pay income tax to DC--a privilege that costs the District hundreds of millions a year. McLean-based Freddie's exemption costs Virginia a bundle as well.

Former DC council member Bill Lightfoot says it's an outrage: "We have so many people in the District going without, while Fannie Mae sits rich, fat, and happy with its huge salaries and profits. We could fix a lot of dilapidated schools and buy a lot of fire trucks if they paid their fair share."

In 1994, when Lightfoot tried to pass a resolution to repeal the exemption, he was barraged by Fannie Mae's lobbyists and its favorite charities. The company threatened to leave DC if he prevailed.

Christopher Shays found another of Fannie and Freddie's privileges--exemption from Securities and Exchange Commission rules--harder to challenge than campaign finance. They're the only companies that don't have to describe their bonds and securities to prospective investors or pay fees to register them--costing the government millions of dollars a year.

Nor have they had to file annual reports with the SEC, notify the public of major changes in their financial condition, or disclose when executives buy or sell company stock. Fannie claims it discloses much of this information anyway, but Representative Baker says, "If those disclosures are voluntary, bank robbery is a charitable activity." In July, after the government dragged them kicking and screaming, both companies agreed to file annual reports and insider trades.

Several governmental agencies have concluded that, taken together, these gifts--the implied backing, exemption from state and local taxes, exemption from disclosure and registration rules--are a taxpayer subsidy. Fannie calls the subsidy "theoretical" because the government has never sent the company a check. A better measure, experts say, is how much another company would pay to get the same deal.

The Congressional Budget Office has tried to figure that out. The first time, in 1996, a Fannie spokesperson said, "This is the work of economic pencil brains who wouldn't recognize something that works for ordinary homebuyers if it bit them in their erasers."

Then in 2001, CBO did all it could to assuage Fannie and Freddie's concerns and consult with independent economists before issuing the report. After receiving a courtesy draft, Fannie announced that the report should be "completely disqualified from any serious consideration."

Why the fuss? To start, CBO found that the subsidy to Fannie and Freddie is worth about $11 billion a year. Some object that many of those benefits go to the well-off. Raines's response: "Talk to Congress."

He has a point. Congress likes the idea of homeownership, and the mortgage-interest tax deduction and other housing tax breaks cost the government $100 billion a year.

What Fannie really wanted to suppress was another CBO finding: that for every $3 of the subsidy that the company passes on to homeowners, it keeps almost $2 for its stockholders and executives. In other words, taxpayers are subsidizing billions of Fannie's profits each year.

"This is worse than $600 toilet seats," says economist Bert Ely.

"It's a slush fund," says consumer advocate Ralph Nader.

Fannie Mae and its consultants insist the company gives back more than it takes. But Federal Reserve chief Alan Greenspan and the Treasury Department have endorsed CBO's findings.

Says Rick Carnell, the former Clinton Treasury official: "Someone should ask Fannie, 'If the taxpayers don't subsidize you, why do you so object to giving up the special benefits you receive?' "

Frank Raines has told Fannie's Customers, the nation's mortgage lenders, that Fannie is the Coca-Cola of the mortgage industry and they are the bottlers. An analogy that paints lenders as a mere afterthought doesn't sit well with people who have spent decades providing mortgages in communities across the nation. It also stokes their greatest fear: that Fannie and Freddie want to exploit their cheaper borrowing costs to monopolize the housing-finance industry. Then, lenders claim, Fannie and Freddie will set whatever prices Wall Street wants.

The lenders probably are more concerned about their own survival than about how much consumers will pay for loans. But it's true that Fannie has decided that its mission to promote homeownership extends to vacation-home loans, refinance loans, home-equity loans, even reverse mortgages for retirees.

"A little bit of what they do allows people to own a home who otherwise would not," NYU's Lawrence White says. "But they mostly help people buy a bigger house, a second house, or a fancier house."

Lenders call it "mission creep." They also complain that Fannie forces them to use its DeskTop Underwriter after they spent millions developing their own systems. They object that Fannie has tried to sell foreclosed homes directly and tried to provide life insurance to homebuyers as a "public service"--until someone leaked a memo about how the program would increase the company's profits. And they lashed out when Fannie partnered with Home Depot's upscale Expo stores to provide installment loans--until critics scoffed that

taxpayers shouldn't be subsidizing hot tubs and sunrooms.

What worries lenders most is that Fannie spends millions each year on radio and print ads. Why does a company that serves mortgage bankers need to promote itself with the public?

A Fannie spokesperson concedes it's good for people to associate Fannie Mae with homeownership. A senior vice president suggests that the ads "educate" officials about Fannie's good works.

More advertising comes from the Fannie Mae Foundation, a charitable organization funded by Fannie Mae the corporation. Last year, the foundation gave out $34.8 million in grants. It spent more than that--$44 million--on television "outreach" ads so consumers can request brochures about obtaining a mortgage. Housing advocates say Fannie's foundation should be doubling the size of its grants rather than spending millions to provide people with information available elsewhere.

Lenders offer another explanation: Fannie wants to brand its name with the public to prepare for the day when the company will lend to consumers directly.

"People want us to be a passive little company that just buys and sells loans," complains Arne Christenson, a Fannie executive who once served as chief of staff to former House Speaker Newt Gingrich.

Former Federal Reserve chairman Paul Volcker may be one of those people. In a recent speech, he said that Fannie and Freddie's mandate originally wasn't to dominate the home-mortgage market. "It was solely to develop a secondary market, and they've gone way beyond that."

To keep Fannie and Freddie from going even further, in 1999 a coalition of big banks, small lenders, home appraisers, and mortgage insurers formed an advocacy group called FM Watch. Its ranks include Mike House, a lobbyist at the law firm Hogan & Hartson, and Haley Barbour, former head of the Republican National Committee.

FM Watch tries to pass itself off as a consumer watchdog group. It's anything but. Nor has the group passed or blocked anything on the Hill. What FM Watch does is fuel the debate over Fannie and Freddie by publishing critical reports and planting negative stories that knock the two behemoths off their game.

In that, they've done well. The Web site fmwatch.org gets more hits from Fannie employees than from anyone else. Fannie has to defend itself against FM Watch's accusations in speeches, in the press, and online. One executive said in an interview he'd have a stroke if an FM Watch report wasn't removed from his sight.

The brawl boiled over last year, when the chief executives of Wells Fargo, GE Capital, and American International Group--all members of FM Watch's board and Fannie customers--told the Wall Street Journal that Fannie and Freddie had threatened to cut off their companies' underwriting business if they continued to support the FM Watch agenda. Industry observers were skeptical that Fannie would risk violating the antitrust laws in such a way--but just as skeptical that the three respected CEOs would lie.

Fannie claims that the episode was a public-relations stunt. Mortgage-industry sources confirm, however, that Fannie has threatened lenders that their business might suffer if criticism gets out of hand.

Some see that criticism of Fannie as sour grapes. Democratic Represen-tative Maxine Waters of California, a member of Baker's subcommittee, says, "FM Watch is just jealous because their products aren't as good" as Fannie's. And as much as the lenders gripe, they like selling their loans to Fannie and Freddie.

Angelo Mozilo, CEO of Countrywide Credit Industries, says Fannie and Freddie "have given us a liquid, organized market. If you took them away, it would be a disaster." But he adds that their ventures into the lenders' market show "a lack of respect" for direct lenders, which has created mistrust.

One reason for "mission creep" is that Raines has promised Fannie's shareholders 15-percent earnings growth a year. That's a bold prediction for any company. (Billionaire investor Warren Buffett sold his Fannie stock in response.) It's even more audacious because mortgages are expected to grow at only half that rate, and Fannie and Freddie already own or guarantee most of the nation's middle-class home loans.

To satisfy investors, critic Bert Ely says, Fannie and Freddie will eventually have to finance the entire middle-class housing market. In a confidential report last winter, Morgan Stanley analyst Ken Posner predicted that the companies' borrowing advantages and management would soon drive many lenders out of business. Fannie's executives appear confident that as long as Fannie makes it cheaper and easier to obtain a mortgage, consumers aren't going to object.

Publicly, Raines claims that the monopoly fears are hogwash. He says you can tattoo it on his forehead that Fannie will never try to lend to consumers directly; he adds that the mortgage market will grow fast enough to keep Fannie busy for years. More important, he says, while middle-class whites already own homes, many other Americans don't; by targeting those underserved borrowers, Fannie can be a positive social force while improving its bottom line.

On March 2, 2000, a story in the Washington Post suggested that Fannie and Freddie's policies were harming the ability of African-Americans and Hispanics to obtain mortgages. The bombshell came from William Apgar, then a top official at the Department of Housing and Urban Development, now a professor at Harvard's Kennedy School of Government.

Raines called a press conference to denounce the story. He also wrote a letter to the editor attacking Apgar's qualifications and accusing the paper of "journalistic malpractice."

Raines has reason to be defensive. Although both HUD and housing advocacy groups have long said that Fannie and Freddie should do more to help underserved borrowers, the loudest voices have been those of FM Watch and libertarian think tanks not known for their interest in providing affordable housing. Raines insists that improving homeownership for all Americans is his top priority.

It's not empty rhetoric: In addition to financing trillions of dollars in loans for targeted groups, Fannie is the nation's leader in developing low-down-payment, flexible-underwriting, and other innovative programs for credit-impaired borrowers. Says Maxine Waters, who represents South Central Los Angeles: "I'm looking at this stuff day in and day out. Fannie has been very responsive in opening up opportunities for minorities and the poor."

But the gist of the Post story was correct. Fannie's good intentions aside, for years HUD has found that Fannie and Freddie lag behind private lenders in serving African-American borrowers and other underserved communities.

A Fannie spokesperson says the company has pledged to do better. Former HUD official Bill Apgar retorts: "Changing the numbers would be better than changing the perception of those numbers."

The lagging numbers are not just embarrassing. Congress has spent a decade goading Fannie and Freddie to increase the proportion of their portfolios devoted to low-income and minority borrowers. In exchange for their benefits, Fannie and Freddie are supposed to be willing to make less profit from affordable-housing loans than from middle-class loans. Wall Street is not encouraging either company in that direction.

Peter Wallison, former counsel to the Treasury and a resident fellow at the conservative American Enterprise Institute, says it's impossible for the company both to maximize profits and to fulfill its public mission. Raines denies that the two tracks are incompatible, but he faces pressure from the competing constituencies.

Fannie's executives claim that outsiders focus on the company's "political story" more often than on its business. But Fannie Mae devotes so much effort to stifling dissent and preserving the status quo that it can be hard to know which is which.

At Raines's disposal is the most formidable team of Washington heavyweights that corporate America has ever seen.

"It's all a matter of know-who, not know-how," complains Ralph Nader about Fannie's higher ranks. "They've perfected all the techniques of lobbying and pay massive salaries for Rolodex hiring to ensure against any change." Nader's favorite example: Fannie Mae vice chair Jamie Gorelick, a well-connected Washington lawyer who earned almost $1 million in her first eight months on the job after serving as counsel to the Defense Department and deputy to former attorney general Janet Reno.

Besides Gorelick, Raines, and former Gingrich aide Arne Christenson, other politicos have cashed in at Fannie's executive suites. Running political campaigns is invaluable: Raines's predecessor Jim Johnson ran Walter Mondale's 1984 campaign after decades as a Democratic kingpin. Coaching debates is worth

something, too: Executive vice president Tom Donilon prepared Michael Dukakis and Bill Clinton for their campaign face-offs, and former general counsel Robert Zoellick prepped George W. Bush for his.

Other political experience counts. Take adviser Bill Maloni, who once lobbied for the Federal Reserve, or senior vice president Chuck Greener, who was communications director of the Republican National Committee. Fannie's board of directors is political by design. The company's charter gives the President the right to appoint five of the board's 18 members. The idea was to ensure that Fannie fulfilled its public mission. Today the five appointees, considered big winners in the capital's game of spoils, promote the interests of Fannie's shareholders. Recent directors include Ann McLaughlin Korologos, Ronald Reagan's Labor secretary; Ken Duberstein, Reagan's chief of staff; Bill Daley, former Commerce Secretary and Gore spokesman during the 2000 election controversy; and Jack Quinn, counsel to Bill Clinton and lawyer to pardoned fugitive Mark Rich.

To support those public faces, Fannie spent more than $6 million last year to influence lawmakers and public officials. That includes the salaries of a sizable in-house staff and retainers paid to many of the city's most prominent law firms and lobbying shops. Fannie's executives often drop the names of various powers that be--a chumminess Ralph Nader says was also true of the savings-and-loan industry before it collapsed.

These politically charged executives, directors, and lobbyists glide into campaign mode whenever Fannie's status is threatened. After the Wall Street Journal criticized the company last spring, Fannie called the editorials a "smear job" and orchestrated protest calls. Top executives Arne Christenson and Chuck Greener--who knew editorial-page editor Paul Gigot from conservative circles--traveled to Manhattan to mend fences.

"After sending around all these nasty letters and launching these incredible missiles, they tried to jolly us, Republican to Republican," says Susan Lee, who wrote the Wall Street Journal editorials.

Christenson started the meeting by passing around old photos of Gigot and himself practicing tricks on the basketball court. The charm offensive didn't work. In June, the Journal's board argued that taking on Fannie and Freddie would be President Bush's biggest challenge after toppling Saddam Hussein.

To court lawmakers, Fannie holds fundraisers and stages public-relations events touting the number of mortgages Fannie has financed in their districts--like General Motors encouraging a senator to brag about how many constituents had bought its cars. Many on the Hill chuckled when Fannie elevated Duane Duncan--the Fannie operative who first called Christopher Shays's office--to lobbyist stardom: Duncan was chief of staff to Representative Richard Baker, Fannie's nemesis in the House.

Not all of Fannie's Lobbyists use a velvet glove. Congressional sources say the company has tried to get unruly Hill staffers fired. And after Baker proposed a stronger regulator for Fannie and Freddie two years ago, Fannie Mae hired a phone bank to call constituents on behalf of the Coalition to Preserve Homeownership, a front for the interests of Fannie, Freddie, real-estate agents, and homebuilders. Some members of Baker's subcommittee were enraged after they received anonymous boxes filled with thousands of letters from constituents protesting a so-called congressional proposal "to raise mortgage costs."

Fannie is adept at trying to smooth over such misunderstandings. On a single day in mid-October 2000, 11 of its employees, including Raines and other top officials, wrote checks for campaign contributions to Democrat Ken Bentsen of Texas, a key member of Baker's subcommittee. A week before, 14 employees contributed to the campaign of Virginia's Chuck Robb, then on the Senate Banking Committee. And to keep the two parties in line, Fannie donated $1 million during the 2000 cycle and another $1 million for the 2002 cycle. That puts Fannie among the top ten corporate donors of so-called "soft" money, just after Microsoft.

Says Charles Lewis, executive director of the DC-based watchdog group the Center for Public Integrity: "Here you have an entity given extraordinary largess that throws around tons of money to maintain its cushy situation."

Also disconcerting, some say, is Fannie's nationwide network of "partnership offices." The official line is that the local offices allow experimentation with innovative mortgage products, but a Fannie executive once admitted that the offices were a cheap way to expand Fannie's political base. One of the first offices was in San Antonio--home to the late Democratic Representative Henry Gonzales, then chair of the House Banking Committee.

Controversy surrounds the Fannie Mae Foundation as well. It gives out more affordable-housing grants than anyone else in the country, provides millions to DC advocacy groups and cultural institutions like the Kennedy Center and Arena Stage, and sponsors the Help the Homeless walkathon and other charitable ventures.

The foundation also helps Fannie Mae fight its adversaries. Although foundation CEO Stacey Davis claims that a "Chinese wall" separates the foundation from Fannie's corporate interests, housing advocates and other critics accuse Fannie Mae of using the foundation's grant money as a weapon.

"It's grant payola," says Nader. "Fannie sprinkles millions around the District and then calls on those groups when the company needs to neutralize dissent."

After Shays and Markey introduced their bill, grant recipients such as the National Urban League and the National Council of La Raza, which advocates for Hispanic-Americans, took a sudden interest in SEC disclosure rules and wrote to support the bill's defeat.

John Taylor, president of the National Community Reinvestment Coalition, an umbrella group for more than 800 neighborhood organizations, says the foundation took away a $65,000 grant after he complained about Fannie's poor record on affordable housing. (Fannie later reinstated the funding.) Reverend Graylan S. Hagler, pastor of DC's Plymouth Congregational United Church of Christ, told Congress that after he challenged Fannie about its zero-down lending policy, the foundation canceled an $80,000 grant to a nonprofit housing group he supported. He picketed Fannie's headquarters and its annual meeting in Texas in response.

A St. Petersburg Times study found that the foundation's grant-giving favors groups affiliated with Fannie's executives or in the districts of powerful politicians. Fannie denies that the foundation is a lobbying arm.

"Fannie Mae is a bit like the tobacco industry," Charles Lewis says. "They use the foundation to try to put a happy face on what they do. The whole thing is part of a perpetual boondoggle so they maximize public risk and private gain."

Thumb through Fannie's press over the years and you'll find lots of predictions that the company's critics are poised to force change. Although that's as unlikely now as in the past, Fannie has alienated many public officials who say they're increasingly skeptical of what they consider the company's sloganeering and political subterfuge.

Peter Wallison of the American Enterprise Institute thinks the government should be fighting Fannie and Freddie's monopoly power just as it went after Microsoft's. Wallison claims "it's hard to know whether the government controls Fannie and Freddie or they control the government." Some say the two companies treat OFHEO, the agency that monitors them, like a lap dog.

Fannie's increasing size and debt also worry regulators. Says one top official: "Every financial institution this leveraged has gotten into trouble. The question is not whether we should do something about Fannie and Freddie, but when."

NYU's Lawrence White argues that Fannie and Freddie no longer need a subsidy: "It's time to say, 'Thanks, guys, you've done well, but now you can go home and swim like everyone else.' "

White thinks Fannie and Freddie could build on their expertise and reputation to continue financing mortgages--but in a free market. In their place, he says, the government could tailor a far more efficient program to help low-income people buy homes.

Critics ranging from libertarians to Ralph Nader have also endorsed full privatization, though Fannie executives dismiss them as "existentialists" and "ideologues." Others have proposed keeping Fannie and Freddie out of the upper-middle-class market, curbing their subsidized borrowing, and ratcheting up the help they must provide to poor and minority homebuyers.

One voice the company can't ignore is that of Wall Street. A mortgage-industry analyst complains that because of "the perception of Fannie Mae's political risk," those who bought the company's stock in the past

year have lost money. Fannie Mae's stock, after going up in late 2000 and early 2001, has traded mostly in the $70-to-$80 range.

You'd never know it from the way Wall Street pushes Fannie Mae as a strong buy.

"We speak with one voice," the analyst claims, "because we're spoon-fed" by Fannie's investor-relations department. He adds that because many analysts work for banks that clamor for Fannie's underwriting business, "a lot of cheerleading goes on in public but not behind closed doors." He says he wishes Fannie would sever its government ties and end the debate.

Fannie denies any such change is in order. Asked about the various proposals, Raines says, "You can't hurt Fannie Mae without hurting homeowners."

Having hoped that Raines would draw on his government experience to broker a solution, some officials are disappointed to see him take such a hard line. They say meaningful discussion is impossible because Raines takes every concern personally and the company politicizes every dispute.

One government official complains: "It's not enough for them to disagree--they have to question your judgment and attack your motives, even imply you're just stupid."

When Fannie is criticized, Raines concedes, "it's like they're attacking one of our children. We're protective to a fault of our mission."

As the Bush administration talks reform, Fannie is likely to fight back by be turning to the public and to Capitol Hill. No one is picketing over Fannie Mae's debt load or demanding that the government stop subsidizing loans for the middle class.

Many policymakers--among them Democratic Representative Paul Kanjorski of Pennsylvania--think the zeal to reform Fannie and Freddie is misguided.

"People marvel at what we've been able to do with homeownership in this country," Kanjorski says. He says he'd like to use the companies' public-private partnership as a model, say, for providing economic aid to distressed areas.

Fannie Mae couldn't agree more. Critics say that reaction--what one calls "their smugness that they're doing the Lord's work"--is typical of Fannie Mae: talking a good populist game while living like kings.

Despite all the noise, Raines says, "the ratio of action to criticism is very low. If something were really wrong, wouldn't someone in the government do something?"