Lessons from Fannie Mae

I came across an article from 2003 in which Fannie Mae boasted about spending trillions to provide mortgages to millions of people who could not obtain mortgages under standard lending criteria. We later came to learn that many of these individuals could not afford, or more precisely could not manage the mortgages that were granted to them based on social rather than market logic. Seven years and $110.6 billion dollars later, it is all too clear that Fannie Mae's & Freddie Mac's abandonment of sound economic principles was a major factor in the creation and destruction of history's largest financial bubble.

The only way that Fannie Mae could ensure equal outcomes (rather than equal opportunities) for targeted groups was to lower lending standards and predictably much higher default rates ensued. Paradoxically and predictably, the artificially increased demand via massive government subsidies made housing even less affordable, i.e. inflated prices.

Of course it seems heartless and even illogical to let market forces, rather than planning inspired by noble principles like "fairness, equity & affordability" determine the volume and allocation of mortgages (or other goods and services). This is especially true when a system of (somewhat) free choice produces inequitable outcomes. But, the inescapable logic of the markets are: if individuals and institutions are unwilling to risk their own capital on someone or something, they're probably not the best bets.
Of course progressives like Barny Frank were ardent idealists when it came to allocating public funds to expand the availability of mortgages to home seekers with sub-par credit. But, I am betting that he would have behaved as a "heartless capitalist" if he was asked to risk his own capital. The same goes for subsidies to "green companies." Of course I very much want to see renewable energy resources replace fossil fuels, but I am skeptical of placing public funds in companies that private investors are leery of investing in. They are basically saying that given their knowledge of the practices and products of that particular company, they do not foresee it becoming profitable. Of course there are narrow, short term investors who will not invest in ventures that do not generate immediate returns, but there are also a surprising number of investors oriented towards long term profits. And if those investors caught wind of a green company with real potential for future profit, quicker than you can say "buy low," they would begin investing their private capital in that company.
In itself the profit of a company or an investor does not represent a social good, however it does reflect the feasibility and desirability of a good or service. Apple Computers became wildly profitable only when it began producing products that were desirable (meet a real need) and feasible (affordable enough to facilitate wide spread use among consumers). Like computer and internet firms before it, green companies will only take off once they develop technologies that make the use of their products affordable relative to other options.

No amount of subsidies can make a product or service take off until market realitities allows them to organically do so. Paradoxically, subsidies may actually reduce incentives for a company to innovate and create feasible and desirable products. Why should they? Their financial well being is more contingent upon the good will of politicians than the value of their goods and services. And subsidies often serve as a mechanism to maintain the dominance of established players in a market rather than allow for new, more innovative companies to enter and compete in that market.

In no way do I believe that markets are perfect or always rational, but with few exceptions they are better allocators of capital and labor than politicians are. While markets and politicians are both prone to errors, markets are self correcting entities, whereas politics is the art of amassing wealth and power until voters discover the extent of your errors.

Fannie Mae passes halfway point in $2 trillion American Dream Commitment

March 18 , 2003

On the third anniversary of its "American Dream Commitment(R)," Fannie Mae and its lender partners already have fulfilled over half of its ten-year pledge to provide $2 trillion in home financing for 18 million historically underserved families, Fannie Mae Chairman and CEO Franklin D. Raines announced today.

To date, Fannie Mae has provided more than $1.3 trillion for nearly 12 million targeted families, completing two-thirds of the American Dream Commitment in about 30 percent of the time, and leading the market in serving minorities and the nation's affordable housing needs.

Joining with representatives from 11 leading mortgage lenders and Fannie Mae partners, Raines applauded the mortgage finance industry for its extraordinary efforts to reach and serve "emerging markets" of historically underserved families and communities, deliver Fannie Mae's $2 trillion in targeted capital, and extend the benefits of the nation's housing boom.

Lender partners participating in today's announcement include: Bank of America; Bank One Corporation; Charter One Bank; Countrywide Financial Corporation; Doral Financial Corporation; First Horizon Home Loan Corporation; Fleet Boston Bank; Huntington Mortgage Company; Irwin Mortgage; J.P. Morgan Chase & Co.; and Standard Mortgage Corporation.

"Together, America's top lenders and Fannie Mae have made terrific progress in bringing the nation's housing boom to overlooked Americans and addressing the gaps in housing opportunity," Raines said. "Fannie Mae applauds our lender partners for helping us surpass the halfway mark in our $2 trillion commitment to underserved families so quickly. Together, we lead the market in serving Americans of color and modest means."

Fannie Mae launched the American Dream Commitment in March 2000 to narrow homeownership gaps, increase the availability of affordable rental housing, and strengthen communities.

The plan included $420 billion to provide minority home financing and in 2002 Fannie Mae boosted that pledge to $700 billion in an effort to help advance the Bush Administration's minority homeownership proposals.

The Commitment consists of a six-point plan: Mortgage Consumer Rights Agenda; National Minority Homeownership Initiative; Opportunity for All Strategy; America's Living Communities Plan; eHomeownership; and Affordable Rental Housing Leadership Initiative.

Highlights of Fannie Mae's 2002 American Dream Commitment report include:

Fannie Mae provided over $1.3 trillion for nearly 12 million families since 2000, including:

•$670 billion for almost 5.5 million families in 2002
•$67 billion for households headed by women
•$190 billion for families in city neighborhoods
Fannie Mae met its voluntary commitment to lead the market in serving minority Americans. Last year, the company provided $136 billion for almost 1 million minority families, which:

•served 213,000 African-American families with $24 billion in financing;
•served 394,000 Hispanic families with $51 billion in financing;
•served 2,488 Native Americans living on tribal and trust lands with more than $217 million in financing;
•served 375,000 other minorities with $61 billion in financing; and
•led to Fannie Mae partnering with lenders and community groups to finance $8.2 billion through our efforts to facilitate Community Reinvestment Act-targeted business.
In addition, Fannie Mae met or exceeded HUD affordable goals for the 9th consecutive year, with almost 52 percent of business serving low- and moderate-income families; almost 33 percent serving underserved areas; and over 21 percent serving very low-income families.

Fannie Mae reported progress in protecting consumers' rights in mortgage finance. The company launched an initiative with lender partners in 19 communities last year to help victims of predatory lending refinance into safer, cheaper loans.

"Fannie Mae is a national leader in the fight against predatory lending and has established a powerful corporate anti-predatory lending policy," said Raines. "The company believes that rejecting loans with predatory features, supporting the adoption of a strong, federal anti-predatory lending law, and providing good capital through good lenders to drive out the bad will ensure that borrowers aren't victimized by unscrupulous predatory lending practices."

Further progress was also reported in The National Minority Homeownership Initiative and the Opportunity for All Strategy.

"Over the next decade, minorities and immigrants are expected to fuel the growth in the mortgage market, making up more than 60 percent of first-time home buyers," said Raines. "We are committed to working with lenders, mortgage brokers, nonprofit housing partners, and others to address the unique financing needs of these emerging home buyers."

The company continues to develop the eHomeownership and Home Counselor Online™ solutions and is committed to an e-commerce environment to drive down the cost of mortgage credit and increase the availability and accessibility of home loan financing to home buyers. Since it first went live in 2001 on www.efanniemae.com, more than 1,100 housing counselors have registered to use the application.

Source: Fannie Mae