Domestic dispute: Fannie Mae is doing better than ever, but the man behind the "American Dream" faces tough criticism - Cover Story - Statistical Data Included - Company Profile

Chief Executive, The, May, 2002 by William H. Miller

2001 was a brutal year to run a business. Any CEO who led a company to record, knock-your-socks-off financial performance amid the twin gloom of recession and war, you'd think, would be showered with kudos.

Not so for Franklin D. Raines, chairman and CEO of Fannie Mae.

His Washington, D.C.-based corporation, formerly the Federal National Mortgage Association, achieved the kind of year most CEOs only dream about, even in good times. It set records in nearly every financial category. Earnings, which had averaged almost 15 percent annual growth for a decade, soared even higher--an astounding 21 percent. Net income also climbed at the same impressive rate, and taxable-equivalent revenues rose 30 percent to $10.2 billion.

Yet rather than taking bows for these glittering results, Raines finds himself fending off criticism.

As the nation's largest supplier of home-mortgage financing--it buys home loans from lenders and packages them for resale as securities, freeing up more funds for loans to home buyers -- Fannie Mae is under fire for not doing enough to support home ownership among African-American, Hispanic, low-income and other "under-served" borrowers. Critics also charge that the company is running up dangerously high debt, putting shareholders, and maybe even taxpayers, in jeopardy. Critics argue, too, that it accepts too many risky, sub-prime loans in which borrowers put little or nothing down and that in the post-Enron environment, it lacks sufficient financial transparency.

Too many government goodies?

As much as anything else, Fannie is accused of simply being too big and of benefiting too much from the federal government. To be sure, the company is gargantuan. It owns or holds in trust for investors one of every five mortgages in the United States, a dominance that worries some members of Congress and that has drawn comment from Federal Reserve Chairman Alan Greenspan.

Much to the consternation of competitors -- banks, lenders and mortgage insurers -- Fannie does get goodies from Washington. Notably, it is exempt from state and local income taxes, a benefit granted the company and its smaller sibling with a similar mission, Freddie Mac, when Congress changed their status from government agencies to shareowner-held firms in 1968 and chartered them as "government-sponsored enterprises." This status, competitors say, allows the two firms to profit unfairly from low borrowing costs because of the belief their bonds are backed by the government.

To Raines, all this flak comes with the territory. Controversy is nothing new to him. For two years before returning to Fannie Mae as vice chairman in 1998 -- he took the top job in January 1999 -- he was immersed in politics as President Clinton's director of the Office of Management and Budget.

Raines acknowledges that the criticism of Fannie is intense and rising. "We're very big and we're very successful," he shrugs. "But every successful company can expect a high level of criticism from competitors who are doing less well." Increasingly, competitors of big, successful companies are directing their complaints to Washington, he notes. "Look at other companies in similar situations as us, like Microsoft and AOL Time Warner. Their competitors can't compete in the marketplace, so they try to compete in the area of politics, regulation and legislation."

But in Fannie's case, at least, the critics "so far have found little sympathy" in the nation's capital, Raines insists. "Most members of Congress have taken the position that if it ain't broke, don't fix it."

Aging of America spurs housing market

Clearly, housing ain't broke. Thanks to record low interest rates -- which also help explain Fannie's spectacular performance -- 2001 was the best year in housing history. Housing starts were up 4 percent and home sales nearly 6 percent, cushioning the recession. "We played a part in that," Raines declares. He thinks the best is yet to come. "Housing will remain a powerful economic driver for at least the rest of the decade because the consumer need for housing is likely to surge," he predicts. This is due in part, Raines points out, to the country's changing population. It is growing and aging and older people are more likely to own homes.

Raines enjoys talking up housing, Fannie's role in it, and the company's 10-year, $2 trillion "American Dream" plan to boost home ownership among 18 million American families. He does a lot of such promoting in speeches. Yet responding to critics necessarily has become a high priority for him.

Avoiding confrontation and combat

"A big part of his job is political and involves answering criticism," observes Gary Gordon, managing director of UBS Warburg investment research firm. "It's always tough to be put on the defensive for something you've been doing well. All he can do is stand by Fannie's record and correct misstatements. He does it very well."

The drumbeat of criticism has hurt Fannie's stock price, Gordon notes. Even though the company posted its best year ever, its share price hit $79.48 at the end of last year--slightly lower than where it started in January at $84.75. Still, Wall Street is bullish. In April, 16 of 23 analysts surveyed by First Call/Thompson gave the stock a "strong buy" recommendation.