A Dream Worth Dreaming: Fannie's 'Charter Chuck'

There must be days when Fannie Mae chairman Franklin Raines goes home, metaphorically kicks the dog and says to himself over a double bourbon: "Why do I put up with this?"

If you've been following the Fannie/Freddie saga of the past eight months you know that the political heat has been turned up big time on these two congressionally chartered mortgage investing giants. The first shoe dropped in June when the Freddie accounting scandal reared its ugly head, resulting in the forced departures of then-chairman/CEO Leland Brendsel and then-president David Glenn.

The second shoe dropped in late December when the Federal Reserve (as in Alan Greenspan) issued a report, saying the two's presence in the market reduces mortgage rates by a scant seven basis points. (Yes, that's right, just seven basis points.) In its report, the Fed (more or less concluded) that the two are no longer needed, at least not in the conventional market.

Keep in mind that the many-tentacled behemoths that they are, Fannie and Freddie have plenty of legs and feet which means there are more "shoes" to drop, especially when Congress returns and revisits the contentious issue of strengthening regulation of the two.

And there's been two other recent, troubling developments for GSE executives. HUD has refused to extend a "bonus point" system that rewards Fannie and Freddie for buying smaller apartment buildings. Also, it's anticipated that the Bush administration wants the two to devote even more of their business to low- and moderate-income homebuyers.

And one other thing: recent changes in campaign finance laws make it harder for Fannie and Freddie to "participate in the political process" (my phrasing) by making enormously generous "soft money" donations to elected officials.

To boot, when it comes to the daily financial press, Fannie and Freddie have a huge bull's eye on their backs. Both are a favorite target of The Wall Street Journal's editorial page, which rarely lets the facts get in the way of a good editorial. And then there's FM Policy Focus, who's mission in life is to fence these two mortgage steers in as though they had mad cow disease.

Yes, if Frank Raines - as well as Fannie's board - has something important to mull over these days it's this: maybe the company should chuck the charter. The pros may very well outweigh the cons.

First the pros: Without a federally restrictive charter, Fannie could enter new markets, like jumbo and subprime (let's face its, Fannie's subprime business is paltry); it could enter ancillary businesses like mortgage, title and life insurance; it could subservice; it could expand overseas to fund and securitize; and yes, it can originate and service loans. It also can gather deposits. Commercial mortgage banking? Why not.

But even better than all that - it could buy or merge with other mortgage companies. An associate of mine suggested recently that if Fannie tossed the charter, its first move might be to merge with its best customer, Countrywide Home Loans. Imagine that - Angelo Mozilo and Franklin Raines, co-chairmen in charge of what would assuredly be a mortgage juggernaut. From there, they might gobble up Washington Mutual. And then they cross the pond and buy Barclays or maybe Deutsche Bank or HSBC. The possibilities would be intriguing. China anyone?

And what are the cons? Well, there's one big one: capital. I'm not an Ivy League-educated bean counter or rocket scientist, so I can't begin to tell how much of Fannie's current capital base is "real" vs. "intangible" or how much it would have to raise if it converted to a bank or thrift.

But somewhere in the bowels of Fannie's corporate mainframe there must be a few white papers on the pros and cons of the GSE charter. There has to be. Two decades ago Fannie Mae chairman David O. Maxwell wanted to dump the charter but his then-protégé Jim Johnson talked him out of it. Back then there were financial reasons not to give back the "government eagle."

But today? If Fannie is as financially healthy as it claims, and if its future growth is endangered by politicians, maybe, just maybe, it's time for Mr. Raines to stroll up to Capitol Hill to tell the boys and girls of the Beltway gang: "Here's your charter back. I don't need it anymore."

Paul Muolo is executive editor of both Mortgage Servicing News and National Mortgage News. He can be e-mailed at: Paul.MuoloThomsonMedia.com

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