- The Washington Times - Sunday, December 16, 2001

It is one of Wall Street's most profitable corporations, a giant that generated $44 billion in revenue last year and landed at No. 25 on Forbes magazine's list of the 500 largest companies.
It is also one of the nation's most visible companies. Flip on the television set or open a newspaper and you probably will see a slick advertisement promoting its business.
And yet, to many Americans, home mortgage giant Fannie Mae is an enigma.
The company's behind-the-scenes role in the mortgage industry helps create the mystique.
Fannie and its "cousin" company, Freddie Mac, do not deal with consumers directly. Instead, the companies buy mortgages from lenders such as banks and credit unions and package them for resale. This essentially transfers the risk from the lenders, allowing them to offer mortgages to consumers who may not otherwise qualify for a home loan.
"Our mission is to make sure the marketplace provides home-ownership opportunities for low- to moderate-income families," said Mary Lou Christy, Fannie Mae's vice president of investor relations.
Fannie and Freddie, which are based in Washington and McLean respectively, also receive government perks.
They are the only publicly traded corporations in the United States that are not required to file financial statements with federal regulators. In addition, Fannie and Freddie each have the authority to borrow as much as $2.25 billion from the U.S. Treasury, although neither has exercised that option.
The companies are also exempt from state and local income taxes.
Tax breaks and other federal subsidies add up to more than $10.5 billion annually, a Congressional Budget Office study found. The companies pass about 66 percent of the subsidy on to home buyers in the form of lower mortgage costs, and retain about one-third for their shareholders, the study said.
Fannie's unusual perks stem from its origins as the Federal National Mortgage Association, an agency created during the 1930s Depression to make it easier for banks to lend money to home buyers.
It became a private company in 1968. At the time, Fannie primarily served mortgage bankers.
Congress created the Federal Home Loan Mortgage Corp., the precursor to Freddie Mac, in 1970 to serve thrifts and provide additional liquidity in the mortgage market.
Freddie Mac became a private company in 1989. Over time, Fannie and Freddie evolved into competitors in the secondary mortgage market.

Calling for change
Critics say the two "government sponsored enterprises," as they are called, need closer scrutiny.
"They are not performing in a manner that satisfies their charter guidelines," said Rep. Richard A. Baker, Louisiana Republican and their leading critic in Congress.
Fannie has been too focused on boosting its stock value and not concerned enough with its mission of boosting home ownership in the United States, said Mr. Baker, chairman of the House Financial Services' subcommittee on capital markets, insurance and government-sponsored enterprises.
Fannie's market capitalization calculated by multiplying a company's stock price by its outstanding shares is $77 billion, one of the highest on Wall Street. Since 1996, its stock has traded between $34.50 and $89.38 a share. Shares closed at $76.77 Friday on the New York Stock Exchange.
The company strives to "maximize shareholder value. But our main goal is fulfilling our charter for Congress," Ms. Christy said.
Liberal consumer activist Ralph Nader stepped up his criticism of Fannie and Freddie last year, calling them "poster children for corporate welfare." The government would need to stage a massive bailout if Fannie and Freddie ever collapsed, said Mr. Nader.
Some of Fannie and Freddie's competitors also have become critical.
Two years ago, the banking and mortgage industries created FM Watch, a group that pays close attention to Fannie and Freddie and regularly publishes reports calling for tougher regulation of the companies.
"Our main problem is that they do have this huge government subsidy that gives them an advantage in the marketplace," said William M. House, executive director of FM Watch.
The companies say they stick to their mission and added that their subsidies are essential.
"We do receive certain benefits as a government-sponsored entity. But those benefits are passed on tenfold to our customers," said Sharon J. McHale, a Freddie Mac spokeswoman.
Sen. Richard C. Shelby, an Alabama Republican and a senior member of the powerful Senate Banking, Housing and Urban Affairs Committee, said the critics miss the big picture.
"You have to look at the totality of what [Fannie and Freddie] have done. Overall, they have been very positive forces," he said.

Understanding the industry
To understand Fannie and Freddie is to understand their complicated industry, the "secondary mortgage market."
The process begins when a home buyer goes to a lender for money to buy a home. These lenders make loans directly to consumers, forming the "primary mortgage market."
In exchange for making the loan, the lender receives a mortgage on the property as collateral.
Once the loan is made, the lender can hold the loan as an investment in its portfolio, sell it on the secondary mortgage market or package it with other loans and sell them to Fannie or Freddie freeing up capital so the lender can make more loans.
Fannie finances the loans it buys for its own mortgage portfolio through the sale of debt securities in the global capital markets. The company sells its debt to both domestic and international investors, including banks, pension funds and insurance companies.
Fannie delivers for its shareholders because it operates only in the secondary mortgage market, said David Hochstim, an analyst for the Bear Stearns Cos. Inc. brokerage.
"They don't deal with consumers directly. They don't have those costs. That makes them a very, very efficient company," he said.

Wall Street winners
While other public companies suffer from the recession and from the fallout of the September 11 terrorist attacks, Fannie and Freddie persevere.
The companies have thrived because the nation's housing market has remained strong. Home ownership in the United States has reached a record 66 percent.
Freddie is on track to have a record year. Its third-quarter net income was $1 billion ($1.40 diluted earnings per share), compared with $645 million (86 cents) in net income a year earlier. Diluted shares reflect options, warrrants and other securities convertible into common stock.
Fannie also reported record earnings for the third quarter. Its net income for the three months ended Sept. 30 was $1.2 billion ($1.19 per share), compared with $1.1 billion in net income ($1.09 per share) during third quarter of 2000.
Fannie has outperformed other major market indicators for years.
Between Dec. 31, 1996, and Sept. 30, Fannie's total returns grew 130.4 percent, compared with a 48.7 percent growth rate for the Dow Jones Industrial Average, a 50.2 percent rate for the S&P; 500 and a 17.9 percent rate for the Nasdaq Stock Market.
Although the companies do not file reports with the Securities and Exchange Commission, they issue public statements on their performance.
Fannie, for example, reports its quarterly earnings through press releases.
The company also issues an annual information statement that includes income, cash flow and equity statements and a balance sheet. It also publishes a glossy annual report, as well as an annual proxy statement that lists salaries for its top executives.
The most recent proxy showedthat the salary for the company's chairman and chief executive, Franklin D. Raines, was $992,500 last year.

Other lines of business
Fannie and Freddie's critics say the companies have other lines of business that aren't directly related to their industry.
Fannie has invested in companies that sell real estate, as well as businesses like LendingTree Inc., an online company that helps customers secure loans for homes, cars and businesses.
"It gives the appearance that they are originating mortgages, which they are forbidden to do," said Peter J. Wallison, a resident fellow with the conservative American Enterprise Institute think tank.
Fannie and Freddie's congressional charters bar them from originating mortgages.
An FM Watch study in March lists more than a dozen other lines of business, including Homesteps, a venture in which Freddie Mac sells real estate from its foreclosure portfolio to consumers.
But analysts say the companies have not drifted from their mission.
"They stay focused like a laser on the secondary mortgage market. That is their business. That is what they do," said Kenneth A. Posner, who tracks the companies for Morgan Stanley Dean Witter & Co.

Foundation questioned
Some critics have attacked the Fannie Mae Foundation, saying the company has used the nonprofit group to "brand" its name in the public eye.
The foundation promotes affordable housing, neighborhood revitalization and consumer education. Freddie Mac also has a foundation, but it focuses on children's causes.
Fannie created its foundation in 1979. It broke off from the company in 1996, with a gift of $350 million in Fannie Mae stock.
The gift was meant to sustain the foundation during its first four years. Last year, the company gave the foundation $30 million. It may make another payment this year, a spokeswoman said.
Last year, the foundation made $34.8 million in charitable donations, such as a $46,296 grant to a program that provides personal-finance counseling for Portuguese-speaking people in Massachusetts and a $250,000 grant to a Habitat for Humanity chapter in Georgia.
The foundation has close ties to the corporation. The foundation's chairman, Mr. Raines, and its vice chairman, Jamie S. Gorelick, are also the company's top officers.
Several of the company's top executives sit on the foundation's board of directors.
The corporation and the foundation also share a sprawling Wisconsin Avenue NW office campus, a series of regal brick buildings that house executive suites, offices and a bustling "market room" where the company sells its debt securities to investors across the world.
"We are solely supported by Fannie Mae, but when it comes to grant making and spending, those decisions are made on this side," said Anthony Tansimore, the foundation's spokesman.

Tighter regulation?
Fannie and Freddie are regulated by the Office of Federal Housing Enterprise Oversight, which issues an annual report to Congress on the companies. The agency's most recent report, dated June 15, states that both Fannie and Freddie exceed financial safety and soundness standards.
The government funds the agency with an annual assessment levied on the companies, which provide offices for the agency's examiners on their corporate campuses.
"Our regulators are on site. You name for me another financial institution that can stand up to this kind of scrutiny," said Arne L. Christenson, Fannie's senior vice president of regulatory policy.
Mr. Baker said the changes that critics seek at Fannie and Freddie will come slowly. Politically, the companies have been practically untouchable because of their populist mission to boost home ownership, he said.
"I feel like I am standing in front of an ice glacier with an 11-watt blow-dryer. I'm just starting to see some drops, but it's going to take time," Mr. Baker said.

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