Fannie Mae's FINE LINE.

The Fannie Mae brand is becoming as well known as Citibank or Bank of America. What some lenders want to know is, Why? Why does a federally chartered enterprise, launched to serve in the shadows of the secondary market need such a high media profile?

A YOUNG AFRICAN-AMERICAN COUPLE

"Rain?" he asks. "Not just any rain--it's our rain, on our roof," she says.

Soft piano music plays as the announcer says--just loud enough not to disturb the couple--"Each year, millions of people spend their first night in a home of their own. ... Call the Fannie Mae Foundation for a free guide to help put you on the path to homeownership."

It's only one of several slick television advertisements designed for the Fannie Mae Foundation by Austin, Texas--based GSD&M Advertising. The ad has elegant production, beautiful yet accessible actors and a simple message: Shopping for a home? Call Fannie Mae. In the world of marketing, it's called building name brand recognition. It's driving some mortgage bankers to distraction.

"I wish they wouldn't," says Glenn Wertheim, president of Charter Mortgage Company in Albuquerque, New Mexico. Like others in his industry Wertheim, a primary lender, sees himself as a customer to Fannie Mae, with Fannie being a secondary market lender by reason of its charter.

"They are certainly not listening to their customers as to what they should or should not be doing," Wertheim says. "What they're doing makes no sense if they plan to stay constrained in the secondary market. It begs the question: Who do they think their customers really are?"

Who, indeed. In the early 1990s, Fannie Mae surveys revealed an untapped market. Research discovered that many potential U.S. homebuyers, of low and moderate incomes--especially minorities--lacked the information they needed to even consider themselves potential homeowners. "That was the impetus for first the corporation and then the foundation to begin its consumer outreach advertising campaign," says John Buckley, senior vice president for communications at Fannie Mae. "Since that effort began in 1993, more than 7 million consumers have gotten information from Fannie Mae or the Fannie Mae Foundation."

Buckley is a neat and efficient executive in a well-oiled and finely tuned mega-corporation traded on the New York Stock Exchange. If you were looking for the ideal communications official-informed, cordial and loyal--it would be John Buckley. He knows Washington and all its players as well as how to put his organization's best foot forward.

Fannie Mae's press announcements boast that it is "the largest non-bank financial services company in the world." With the confidence borne of such corporate muscle, Buckley flatly says, "A lot of issues of lender concern are not entirely rational." He adds, "Our hope is that they go away over time."

To be fair, Fannie Mae's chairman and chief executive officer, Franklin Raines, devoted his first speech as chairman to the annual convention of mortgage bankers to allaying the fears of his customers. In October, at the Boston meeting of the Mortgage Bankers Association of America (MBA), Raines sought to shut down the rumors about Fannie wanting to be in the direct lending business. He said he had spent his first year as chairman listening to the concerns of lenders and this is what he heard: "You want a clear separation of roles between lenders and Fannie Mae. And so do we. We know what your role is, and we know what our role is. You originate the mortgages. We buy them. Period. That's all we can do. That's all we want to do."

And yet the buzz persists, bedeviling Raines and the rest at 3900 Wisconsin Avenue.

Outside Buckley's office with the desk, conference table, credenza, television, VCR and bookshelves, the rest of Fannie Mae is guarded like Fort Knox. A drive around the cobblestone horseshoe at the front of Fannie Mae's corporate headquarters is enough to bring out two guards dressed like Mounties. The building is pretty (a scale model of the Governor's Mansion at Williamsburg) but massive, although there's little or no sign of life outside. Inside, employees wearing IDs rush about and a visitor wonders what they're all doing so feverishly.

There are some mortgage bankers who fear they're engineering the demise of primary mortgage lending as we know it. Tom Sullivan, chief executive officer and president of Melville, New York-based Roslyn National Mortgage Corporation, says of Fannie Mae, "I know they're saying that's not their intent." But Sullivan says that, to survive, he's compelled to be paranoid and figure out what he would do if Fannie Mae were to get into mortgage originations.

Roslyn National Mortgage Corporation is a midsize lender, utterly dwarfed by the mighty Fannie Mae. "Norwest and Countrywide can compete head-to-head with Fannie Mae," says Sullivan. "It's a bigger challenge to midsize and smaller lenders."

Sullivan finds the Fannie Mae Web site particularly intriguing, and wonders if its various features represent Fannie Mae's first steps toward the business of originating loans. As November began, the site announced: "This week, homebuyers will save up to $15,400 over the life of their Fannie Mae mortgage." The "For Sale" icon is another red flag to concerned lenders like Sullivan, as Web site visitors are urged to "View Fannie Mae Property Listings Online." Further into the site is the Home Purchase Path, where a visitor can click on "Shopping for your best mortgage deal," "Steps to apply for a mortgage loan," "What happens after you apply?," "Closing on your home" and "In your new home."

The Fannie Mae Properties link enables visitors to learn "How to buy a Fannie Mae-owned single-family home," asking visitors to enter a price range, a locality and property type. The site lists lenders around the country and specifically does not propose that a homebuyer go directly to Fannie Mae to make a purchase. Still, the Fannie Mae Web site is a considerable presence in the world of online mortgage banking, with charts, names, numbers, addresses and check lists.

Sullivan speculates that if Fannie Mae were to set its sights on originations, its elaborate Internet presence could be the camel's nose under the tent. "What if I wake up one day and Fannie Mae is going directly to customers?" Sullivan wonders. "It's scary."

This lender sentiment has been haunting Fannie Mae for the past year--and it's not going away.

Earlier this year, Fannie Mae Chairman Raines sought to assuage the fears of primary lenders suspicious about the company's aggressive marketing strategy. In New York last January, again speaking to an MBA conference, Raines said, "What we don't want to be, what we never want to be, is your competitor. So let me state in plain words ... that Fannie Mae will not originate mortgages. Now, if tattooing this to my forehead would help to drive home the point, I would do it. Fannie Mae will not originate mortgages, period."

Ronald Rudy, president of Portland Mortgage Co., in Portland, Oregon, was at the January MBA conference when Raines first pledged to stick to the secondary mortgage business. He wasn't completely sold. "Often, it appears to a lot of us in the industry that they seem to be positioning themselves with the types of vehicles that would permit them to go there," says Rudy, who sees Fannie Mae as a D-day force that could, if authorized, "make the push and hit the beach" of primary lending.

According to Forbes and Fortune magazines, Fannie Mae is the nation's third-largest financial institution, with assets of $551.5 billion as of third-quarter 1999. By its own accounting, Fannie Mae is the largest source of home mortgage financing in the United States. It is a New York Stock Exchange company and the largest nonbank financial services company in the world. Its third-quarter earnings registered $991 million, or 94 cents per common share, diluted. Third-quarter earnings for 1999 were up 16 percent compared with the same period in 1998. For the first nine months of 1999, Fannie Mae's net income was $2.874 billion.

About 4,000 people work at Fannie Mae, three-quarters of them in and around the nation's capital. Fannie Mae stock is strong and reliable, and the company's standing is further enhanced by the fact that it's not required to register securities it sells with the Securities and Exchange Commission. The Washington Post estimates that this perk alone saves upwards of half a billion dollars a year.

Fannie Mae does not pay state or local income taxes, but does pay property taxes wherever it has offices. By charter, the company has a "back stop" of $2.25 billion with the U.S. Treasury Department, which enables it to get in line at Treasury ahead of many other borrowers if Fannie and everyone else in the economy tanks. The $2.25 billion figure was established in 1968, when, according to one Fannie official, "two and a quarter billion meant something!"

In short, Fannie Mae can afford the best that money can buy. "Their charter does prohibit them from originating loans," says Rudy. "But when you look at the firepower they have in Congress: the best guns for lobbyists who can go directly to the Hill.... If Fannie Mae wanted to go all out and obtain authorization to expand their charter," says Rudy, "I don't know that we'd be that successful" in stopping it. "If they gain momentum, it's going to be a juggernaut to defend against because they are the 500-pound gorilla."

Last summer, the MBA issued a policy statement reflecting those concerns. The document applies to the activities of both Fannie Mae and Freddie Mac. Among other things, the statement declared: "MBA supports prohibitions against participation by the GSEs [government-sponsored enterprises, i.e., Fannie Mae and Freddie Mac] in any primary mortgage market activities, including the current statutory prohibitions against the GSEs providing or engaging in direct lending to borrowers.... The GSEs should introduce new products and services only when they directly relate to their core functions of providing liquidity and stability in the secondary mortgage market."

Over dinner with Fannie Mae's Frank Raines, Rudy recalls saying, "Frank, I need a healthy you and you need a healthy me and there has to be a fine line of compromise that permits us both to be healthy." Rudy envisions a regulatory firewall being maintained that bars Fannie Mae from any involvement in the origination side of the business.

Fannie Mae executive Buckley says the legal wall between the Fannie Mae Corporation and the Fannie Mae Foundation, affirmed in late 1995 by the Internal Revenue Service, ensures such an outcome. For example, the 7 million individuals who have sought information about home-buying and related issues from Fannie Mae in this decade were served by the foundation. "The 7 million names are walled off from the corporation being able to do anything with them," Buckley says.

But let's imagine, for a moment, that even half of that 7 million decided they were so impressed by Fannie Mae that they wanted to borrow directly from the company. That hypothetical 3.5 million could provide powerful grass-roots backing for a potential lobbying push to change the rules, if it ever came to that. That's why many of the nation's primary lenders don't trust the foundation's high-profile media campaign, estimated by Advertising Age to run roughly $30 million a year. "If you took a survey of consumers across the country," guesses Rudy, "they don't totally understand the role that Fannie Mae plays. I would much rather see Fannie Mae push the point during their ads: Go see your lender first. They don't use that approach. Some people in the industry think that could be one of the baby steps they're taking to make Fannie Mae a direct lender."

Fannie Mae established an ambitious set of goals for itself called the "Trillion Dollar Commitment." Announced in 1994, the company promised to provide that much in targeted housing finance to help 10 million underserved families purchase a home by the year 2001. Low- and moderate-income families would be on the receiving end of this campaign, as well as minorities, new immigrants, residents of central cities and distressed communities and others with special needs. Fannie Mae is well on track with its goal, having hit the 10 million served mark recently.

The Fannie Mae Foundation in late September launched a national educational advertising campaign called "Your Credit Matters," stressing the importance of sound credit. The campaign is designed to help shore up the effort to meet the goal to serve more underserved families. "In 1998," says Buckley, "the Fannie Mae Foundation did a survey of African-American and Hispanic attitudes toward homeownership. Even though there had been a significant rise in homeownership in the 1990s, we discovered there was a significant blind spot in the role that credit plays in your ability to get qualified for a mortgage."

So Fannie Mae has begun a new assault, with advertisements to educate homebuyers about the importance of paying bills on time, good credit and how to repair bad credit. In addition, a 30-minute educational program about these issues is scheduled to run every Sunday for the next couple of months on television on the Black Entertainment Network.

Fannie Mae sees this as "expanding the pie" for mortgage companies nationwide. Concerned mortgage bankers see it as building a constituency and potentially a customer base. Concerned mortgage industry players around the country are banding together to press Congress to keep a more watchful eye on Fannie Mae as well as Freddie Mac, to ensure they don't stray outside their charters. And the Department of Housing and Urban Development (HUD) is bird-dogging Fannie's and Freddie's business practices and liquidity as one of two regulators that monitor both corporations for compliance with their charter missions.

The principal regulator for safety and soundness, the Office of Federal Housing Enterprise Oversight (OFHEO), is proposing new rules to make certain Fannie Mae (and Freddie) maintains enough capital and manages its risk, so that it is capable of honoring outstanding obligations and liabilities. A trial run of financial records from two years ago reflected some weakness in this area, according to OFHEO spokeswoman Jill Weide. But Fannie Mae's Buckley declares that the company would have required a relatively small amount of money to meet the liquidity standard reflected in the OFHEO trial run. He asserts there will be no question about Fannie's ability to meet final OFHEO standards.

The comment period for these rules was extended by 120 days, beyond November and into March 2000. OFHEO had several extension requests from Fannie Mae, Freddie Mae, mortgage insurers and mortgage bankers. Weide says that all these groups want to see precisely how the rule would operate. Once the comment period ends in March, OFHEO is expected to decide if its proposed rule needs changes or if it should stand. Once the rule is final, both Fannie Mae and Freddie Mac would have a year before it is binding.

Industry support

There are those who back Fannie Mae and its aggressive approach to market outreach wholeheartedly. Angelo R. Mozilo, chairman and chief executive officer of Countrywide Credit Industries, Inc., Calabasas, California, is one of them. Countrywide is one of several significant players in the mortgage industry that has signed up with either Fannie Mae or Freddie Mac to deliver the vast majority of its conforming conventional loans exclusively to one or the other of these secondary market giants in exchange for certain agreed-upon terms, for example, attractive pricing.

Mozilo, a past president of MBA and a leader in the industry, is sharply critical of those who fear Fannie's potential entry into direct originations. "It's nonsense, utter stupidity," he says. Of Fannie Mae, Mozilo says, "Without them, we'd be dead. That's a good starting point. They have a lot of smart people [who] think about strategic planning all the time. They create liquidity for all of us. I would like them to be very aggressive to provide programs to lower the barrier of entry into homeownership."

Even Roslyn National Mortgage's Sullivan has praise for Fannie Mae's minority outreach campaign. "Fannie Mae has done an excellent job creating an awareness and making funds available to people who may have not had access to funds," he says. "That awareness has stimulated a housing market and enabled mortgage bankers like me to create new business."

Ron McCord, chairman of Holiday American Mortgage Co., in Oklahoma City, Oklahoma, and former president of the MBA, views Fannie Mae as a partner. He believes that challenges to the mortgage banking business are industrywide and owe mainly to the changing face of the business and "the way the mortgage product has been commoditized. There are so many other ways to get a mortgage versus the traditional way our business grew up in," McCord says, noting the Internet, controlled business arrangements and other innovative business deals.

Fannie Mae is a publicly held, market-driven company, says McCord. "They'll look for opportunities to increase their earnings," he says philosophically. "Does that mean they're going to take me out of the origination business? I don't think so."

Others aren't so sure. Portland Mortgage Company's Ron Rudy has decided to remain vigilant, borrowing a phrase from another Ron who wrote the book about uncertain relationships. "Trust but verify--hat's where I'm at," he says. But he adds, "I also have very strong relationships with both Fannie Mae and Freddie Mac, and benefit from their efforts to broaden homeownership."

Louise L. Schiavone is a television reporter and freelance writer based in Washington, D.C.