Fannie Mae's Reconstruction Period
Friday, November 26, 2004PAUL KANGAS: While Fannie Mae has been under fire for accounting oversights, the mammoth home mortgage company touches the lives of most Americans who buy a home. Angela Terrell Heath explains how Fannie Mae drives the nation`s mortgage market.
ANGELA TERRELL HEATH, NIGHTLY BUSINESS REPORT CORRESPONDENT: You can see the power of Fannie Mae here at this computer. The program is called Desktop Originator and it`s the automated underwriting system developed by Fannie Mae. It helps lenders like Jim Maclin determine a mortgage applicant`s risk. Filled with decades of data, the software raises red flags when it spots potential problems in an application. But it also allows Maclin to successfully process thousands of mortgage applications a month.
JIM MACLIN, PRESIDENT, PREFERRED MORTGAGE: It`s rapidly increased the approval process. What used to take 30 to 60 days for the process from beginning to close from finding the house, making an application for that property and closing, it can be as short as a week.
HEATH: When Fannie Mae`s software approves a loan, it`s agreeing to buy that loan from Maclin later. In return, Maclin gets cash to make more loans.
MERCY JIMENEZ, SR. VP SINGLE FAMILY BUSINESS, FANNIE MAE: Whether you are a first-time home buyer, a borrower on your 20th refinance or a senior who needs a reverse mortgage, we like to feel that we`re going to equip our lenders and our partners with the ability to deliver the right mortgage for each borrower.
HEATH: So far this year, the company has bought more than $200 billion worth of mortgages from hundreds of lenders around the country. The company currently has a total of just over $900 billion in mortgages and mortgage securities in its own investment portfolio. Fannie Mae sells most of the homes in the form of mortgage-backed securities. These are bundles of similar mortgages sold to investors such as pension funds and banks around the world. Fannie Mae guarantees that investors will get the cash flow that the securities promise.
TOM STANTON, PROFESSOR, JOHNS HOPKINS UNIVERSITY: Fannie Mae is very important to the financial markets because it`s so big. It`s a $2 trillion institution. That`s huge. So it`s very important. That`s different from asking, do we need Fannie Mae.
HEATH: Congress created Fannie Mae in 1938 to provide a steady flow of money to finance housing for low and moderate income buyers. The company is publicly traded but it has a line of credit with the U.S. Treasury that some say gives it an implicit Federal guarantee.
KENNETH GUENTHER, PRESIDENT, GUENTHER CONSULTING SERVICES: When they go out and borrow money, they can borrow money at a cheaper rate because the people lending the money, the foreign governments, the investors of the west, are there saying, well, our money`s not at risk. Our money is good because the U.S. government will be there as a backstop.
HEATH: Critics charge this relationship gives Fannie Mae an unfair advantage in the marketplace. Some say the company`s portfolio has gotten too big. They say if the mortgage market sours, Fannie Mae will be stuck holding a bunch of bad loans, forcing a government bail out. The company has come under increased scrutiny. Its regulator, the Office of Federal Housing Enterprise Oversight released a report two months ago criticizing Fannie Mae`s accounting on complex transactions.
STANTON: Fannie Mae is most important because it`s so large. It`s fast growing. It`s highly leveraged and it`s poorly regulated.
HEATH: These concerns put reform of Fannie Mae near the top of the congressional agenda next year, but Congress isn`t the only group concerned. Investors and housing experts are worried that Fannie`s problems could impact the entire mortgage finance system. Angela Terrell Heath, NIGHTLY BUSINESS REPORT, Washington.
