Fannie Mae
History of Fannie Mae
Fannie Mae was created in 1936 during the Great Depression to provide a secondary market to encourage greater use of the innovative long-term, fixed-rate, level-payment, fully amortized mortgages that the newly created Federal Housing Administration (FHA) was insuring against loss of principal and interest.
The exercise was a success, and this type of innovative mortgage became the standard means of financing the postwar housing boom that raised the homeownership rate from 44 percent in 1940 to 69 percent by 2004.
By the 1970s, the basic purpose of the "government sponsored enterprises" (GSEs) had shifted to the role of adding more funds to the housing market by connecting prospective homebuyers with major capital markets. To accomplish this goal, the GSEs use their preferred credit rating to borrow in major financial markets and use the funds raised to acquire residential mortgages from brokers and other mortgage originators, earning profits and covering expenses on the difference in the interest rates earned and paid.
The GSEs also package mortgages acquired from originators into “pass through” securities that are collateralized with qualified residential mortgages. Payments of principal and interest made by the homeowners are then “passed through” to the investors holding the securities.
In the late 1970s and early 1980s, Fannie Mae made a bad bet on interest rate trends that left the institution technically insolvent as its net worth briefly turned negative, raising fears of a financial collapse. Fannie Mae later recovered when the Federal Reserve’s monetary policy of the early 1980s led to dramatic declines in market interest rates, restoring the value of Fannie Mae’s loan portfolio.
After implementing new financial controls and investment practices, Fannie Mae came out of its near-death experience as a better-managed operation. Nonetheless, the possibility that it might fail could disrupt financial markets in general and mortgage markets in particular. This, in turn, led to calls to limit its size, scope, and privileges.
In response to growing concern and criticism, Fannie Mae adopted an aggressive public relations program that was quickly copied by the Federal Home Loan Banks (FHLBs) and Freddie Mac, the other housing-related GSEs. With executive pay, bonuses, expense accounts, and other top management perks, and by promoting its stock to Wall Street analysts, Fannie Mae presents itself to investors as a hard-charging, profit-minded growth company.
Wall Street brokerage firms and investment banks earn more than $100 million in fees annually from the issuance of Fannie Mae and Freddie Mac debt instruments and mortgage-backed securities. Wall Street returns the favor with enthusiastic endorsements of their role in the economy and financial markets.
However, when protecting itself against the few congressional reformers and marketplace competitors and selling its debt to foreign central banks at favorable interest rates, Fannie Mae poses as a public-purpose government entity that helps America’s disadvantaged to become homeowners.
As part of this effort to garner influence, Fannie Mae has hired lobbyists by the score and created the Fannie Mae Foundation, which over the past five years has pumped $500 million into highly visible and heavily promoted local projects and grants. In the process of spreading its message, every interest group is cultivated.
The Business Morale of Fannie Mae
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The Bush Administrations “Enron” Scandal of the Financial Market
Between 1999 and 2003, 9.0 percent of the conventional conforming loans (the type the GSEs are authorized to buy) made by the private mortgage market were to first-time minority homebuyers. By contrast, only 4.7 percent of Fannie Mae loans and 3.5 percent of Freddie Mac loans over the same period were to first-time minority homebuyers.
Although one could give Fannie Mae the benefit of the doubt and view this failing as simply one of neglect, other actions by Fannie Mae in late 2004 and early 2005 suggest both that the neglect may be willful and that it reflects the company’s bias against prospective lower-income, entry-level homebuyers. In January 2005, coalitions of low-income housing advocacy groups published reports that challenged the value of policies promoting and encouraging homeownership among poor and moderate-income neighborhoods, arguing that homeowner “benefits may have been overstated” and that “rentals, public housing and other options may make better economic sense.” Although these organizations had previously published a number of papers and reports expressing skepticism about the value of homeownership, the two most recent reports, published in January 2005, were funded by the Fannie Mae Foundation.
Suspiciously, the release of these anti-homeownership reports by the Fannie Mae-assisted advocacy groups was followed one month later by the release of a new rule from the Department of Housing and Urban Development (HUD) requiring Fannie Mae and Freddie Mac to improve mortgage availability to minority and moderate-income-buyers. In effect, while Fannie Mae was conducting a massive and costly public relations campaign to present itself as the benefactor of moderate-income and minority homebuyers, it was funding studies that undermined that very goal. In a town awash with insincerity, the ambidexterity of Fannie Mae’s principles is in a class by itself.
The evidence reveals that Fannie Mae’s management team appears to be the chief beneficiary of the federal privileges and the accounting irregularities that were recently uncovered. For example, in 2003, 749 members of Fannie Mae’s management team received a staggering $65.1 million in bonuses, a portion of which was attributable to the overstated earnings that followed from the accounting irregularities. Over the past five years, the top 20 Fannie Mae executives reportedly received combined bonuses of $245 million.
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