Foes of big government have lined up to take a swipe at Fannie Mae, the government-sponsored enterprise that helped finance 100,000 affordable households last year. By Matthew Power
When a recent Wall Street Journal editorial titled "Fannie Mae Enron" suggested that Fannie Mae puts taxpayer money at risk, mortgage industry lobbying group FM Watch couldn't have agreed more. Underwritten by banking associations and lenders, FM Watch aims to put a tourniquet on the $10.6 billion transfusion of government subsidy that Fannie gets each year and move all those lucrative housing mortgages into the private sector.
"Our goal is not to get rid of Fannie Mae," says Jonathan Grossman, a consultant with the Washington-based FM Watch. "What we want is full disclosure of what they do. The interest risk they have is very significant. They're one of only two publicly traded companies [the other is Freddie Mac] that don't have to register with the FTC. 'Trust us,' they say. 'Your money is safe.'"
Last year, CEOs of major banking institutions, such as Wells Fargo and J.P. Morgan Chase and Co., tried unsuccessfully to prompt congressional inquiry into Fannie's alleged bullying. They said Fannie threatened them with financial punishment if they remained part of FM Watch.
This year, however, fueled by the Enron scandal, a task force has been formed by the Office of Federal Housing Enterprise Oversight to look at Fannie's money management--specifically, their use of derivatives trading. The organization has $459.4 billion in derivatives principal outstanding.
Photo: David Clark
How real is the risk? Inside Mortgage Finance newsletter reports that one of last year's winners of the Nobel Prize for economics puts "the statistical probability of Fannie Mae and Freddie Mac encountering an economic shock as severe as the one envisioned by their current risk-based capital standard 'substantially less than one in 500,000--and may be smaller than one in three million.'" (This study was, the record should note, sponsored by Fannie Mae.) Robert McCarson, spokesperson for Fannie Mae, says FM Watch is waging a smear campaign on the behalf of its corporate backers. "What irks them is that they want a day when they can aggregate mortgage lending. The reality is that with our technology, we enable very small lenders to go toe to toe with big lenders."
"We're talking about an incredibly vocal lobbying effort, funded by millions of dollars from the banking industry," he adds. "If you'd like a taste of what life would be like without Fannie Mae, look at mortgages one dollar over our maximum amount of $300,700. At one dollar over our limit, a loan will cost you 25 to 50 basis points more."
"That's because Fannie Mae has this huge government subsidy to lean on," counters Grossman. "Every year, they meet their affordable housing goals, but so do conventional lenders. Our point is that Fannie Mae should be leading the affordable lending market. Our numbers show that when you look at average loan amounts to African Americans, for example, Fannie is buying the more expensive loans. They're cherry picking the most valuable loans, not aiming for affordability."
Accusations of sloppy numbers have gone back and forth between Fannie Mae and FM Watch for some time now. Recently, the NAHB has stepped in to defend Fannie Mae, a frequent partner with builders at all levels. In a letter to Congress, NAHB execs wrote: "Fannie Mae and Freddie Mac are extremely critical components of this nation's housing delivery system. That we have become the best-housed nation in the world is due in large part to the contributions of these two companies. With the help of Fannie Mae and Freddie Mac, nearly two-thirds of the nation's households are homeowners."
"The attempts of FM Watch to smear us in 2001 have not translated into political support," notes McCarson. "Nobody supports their agenda, which is higher mortgage rates."