Fannie Mae Case-GS - Tuck School of Business

Fannie Mae 

On a bright February day in 2002, Franklin Raines sat at his desk, 

looking through his office window across the courtyard at the 

Georgian architecture of Fannie Mae’s corporate headquarters. The 

previous evening, he had been reading The Mystery of Capital by the 

Peruvian economist Hernando de Soto, and the book had given Raines 

a powerful idea for a speech he was preparing to deliver at Howard 

University in a few weeks’ time. Additionally, it sparked Raines’ 

thinking about an important strategic issue within his own company. 

In his book, de Soto explored the question of why some countries are 

successful at capitalism while others fail, and found that it had less to 

do with cultural differences than with the legal structure of property 

and property rights in different countries. As de Soto examined the 

issue, he noted that every developed nation in the world at one time 

went through the transformation from a predominantly informal 

system of ownership to a formal, unified legal system of property 

rights. In Raines’ estimation, when this transformation took place in 

the United States, African Americans were systematically excluded 

from the process, and this would put them at a disadvantage for years 

to come. And while de Soto argued that assets had two lives in 

America (you could live off them and you could leverage capital from 

them to unleash wealth,) Raines recognized that too few minorities 

in the United States enjoyed the wealth creation associated with 

homeownership, because too few of them could afford homes. 

Raines reflected on Fannie Mae’s mission statement, “to tear down 

barriers, lower costs, and increase the opportunities for homeownership 

and affordable housing for all Americans.” Given that minorities 

were underserved by traditional borrowers and often the target of 

predatory lenders, Fannie Mae needed to play a critical role in dealing 

with this difficult social problem. 

This case was developed by Professor Paul A. Argenti and Thea Haley at the Tuck School of Business at 

Dartmouth, with research assistance from Lindsay Amon at the Tuck School and Carolina Campbell at 

Goldman Sachs. 

© 2003, Professor Paul A. Argenti, The Tuck School of Business at Dartmouth


Raines picked up his telephone and called his speechwriter. For his speech at Howard, 

Raines decided he wanted to take the angle of how different things would be for minorities 

if property laws had been developed to include them – how much greater a share of the 

nation’s wealth they would possess today. His speechwriter headed a team of researchers 

who could look into this issue more carefully and provide data that Raines might work 

into his speech. “Let’s talk about the Charter Day speech I’ll be giving at Howard in a few 

weeks.” 

Raines was eager to get his speechwriter going on this project, and also inspired by the 

fresh thinking in de Soto’s book to take a closer look at one of Fannie Mae’s own key 

strategic initiatives: Raines recognized that for Fannie Mae to make a significant impact in 

helping more minorities realize the American dream of homeownership, he would have to 

get both his own company and all of the participants along the mortgage market’s value 

chain to look at minority lending in a new light. 

Company Background 

The Federal National Mortgage Association, commonly referred to as Fannie Mae, was 

originally established in 1938 by Congressional charter to provide liquidity to the nation’s 

housing market by buying mortgages insured by the Federal Housing Administration 

(FHA) in the aftermath of the Great Depression. By purchasing FHA mortgages from 

lenders and subsequently Veterans Administration (VA) mortgages, Fannie Mae 

replenished the lenders’ capital to make loans available to more homebuyers. 

In 1968, President Lyndon Johnson signed legislation amending Fannie Mae's Charter Act 

to partition it into two separate entities; one to be known as the Government National 

Mortgage Association (Ginnie Mae) and the other to retain the name of the Federal 

National Mortgage Association. Ginnie Mae remained in the government while Fannie 

Mae became entirely privately owned and was removed from the federal budget. In 1970, 

Congress gave Fannie Mae authority to purchase conventional mortgages and created the 

Federal Home Loan Mortgage Corporation (known as Freddie Mac) to also provide 

support to the conventional and FHA/VA mortgage segments. Today, Fannie Mae and 

Freddie Mac are both private corporate entities that issue stock that trades on the New 

York Stock Exchange. 

Fannie Mae operated as a government-sponsored enterprise (GSE), mandated to “provide 

stability and liquidity in the secondary mortgage market, provide secondary market 

assistance relating to mortgages for low-and moderate-income families, and promote 

access to mortgage credit throughout the Nation, including underserved areas.” 1 Fannie 

Mae and Freddie Mac were considered to be “government sponsored” because Congress 

authorized their creation and established their public purposes. 

As a GSE, Fannie Mae was exempt from state and local taxes (other than real estate taxes) 

and was not subject to the SEC securities registration and reporting requirements that 

applied to public companies. Additionally, the Treasury had discretionary authority to 

purchase up to $2.25 billion of Fannie Mae’s obligations. 

Goldman Sachs & Executive Leadership Council and Foundation 2


The U.S. Department of Housing and Development (HUD) was the mission regulator of 

Fannie Mae and Freddie Mac, setting and monitoring the GSEs’ affordable housing goals 

and ensuring their compliance with fair lending principles. In 1992, Congress amended the 

GSE charters to increase governmental oversight over them. Under this legislation, the 

Office of Federal Housing Enterprise Oversight (OFHEO) was established as an 

independent office within HUD responsible for regulating the housing GSEs’ safety and 

soundness, ensuring that they remain adequately capitalized and operate safely. 

Fannie Mae claimed to be in the “American Dream” business in a nation where 

homeownership was at the core of every family’s aspirations. This was not an idle claim. 

By 2001 Fannie Mae had guaranteed or purchased one out of every four mortgages 

outstanding and by replenishing the resources of mortgage originators, had enabled 

decades of mortgage market stability and growth. At year-end 2001, Fannie Mae’s net 

mortgage portfolio totaled just over $700 billion, and other investors held over $859 

billion of mortgage backed securities (MBS) guaranteed by Fannie Mae. 

Fannie Mae was the second largest American corporation in terms of assets and the 

nation’s largest source of financing for home mortgages. Headquartered in Washington, 

DC, the company had approximately 4,500 employees at year-end 2001. 

Exhibit 1: Company Timeline 

1968 

After 30 years of business, President Lyndon B. Johnson signs legislation amending Fannie Mae’s 

Charter Act and establishes Fannie Mae as a private, shareholder-owned company. 

1970 

Fannie Mae stock (FNM) is listed on the New York and Pacific stock exchanges. President Richard 

M. Nixon signs legislation authorizing Fannie Mae to purchase conventional mortgages. 

1978 

The conventional mortgage program expands to include the purchase of two- to four-family 

homes. 

1981 

Chairman and Chief Executive Officer David O. Maxwell joins Fannie Mae. The corporation 

begins purchasing adjustable-rate mortgages (ARMs) and second mortgages and introduces its 

Mortgage-Backed Securities (MBS) business. 

1982 

1983 

1984 

1988 

1991 

1992 

1993 

1994 

1996 

Fannie Mae funds one of every seven home mortgages made in the U.S. 

Fannie Mae begins purchasing conventional multifamily housing loans. 

Fannie Mae issues its first debenture in the overseas Euromarket, marking its entry into foreign 

capital markets. 

Fannie Mae stock is added to the Standard & Poor’s 500 stock index. 

James A. Johnson becomes Fannie Mae’s Chairman and Chief Executive Officer. The $10 billion 

“Opening Doors to Affordable Housing” initiative is launched. 

Fannie Mae becomes, for the first time, the largest issuer and guarantor of MBS, surpassing Ginnie 

Mae and Freddie Mac. 

Fannie Mae exceeds the “Opening Doors” goal of producing $10 billion in purchases for low- and 

moderate-income and other special housing needs. 

In an expansion of the “Opening Doors” campaign, the Trillion Dollar Commitment is launched, 

pledging $1 trillion in targeted housing finance that will serve 10 million low- to moderate-income 

families. 

Fannie Mae celebrates its 10th consecutive year of record earnings. Fannie Mae contributes $300 

million to the Fannie Mae Foundation to expand its consumer outreach efforts. 



1998 

1999 

1999 

2000 

2001 

James A. Johnson announces his intention to retire. Franklin D. Raines joins Fannie Mae as 

Chairman and Chief Executive Officer - Designate. Fannie Mae reaches $1 Trillion mark in 

mortgage book of business outstanding. 

Franklin D. Raines becomes Fannie Mae’s Chairman and Chief Executive Officer. Conventional 

loan limit increases to $240,000. 

Fannie Mae changes its Mission Statement to: 

Our Mission is to tear down barriers, lower costs, and increase the opportunities for 

homeownership and affordable rental housing for all Americans. Because having a safe place to 

call home strengthens families, communities, and our nation as a whole. 

Fannie Mae fulfills the Trillion Dollar Commitment ahead of schedule and launches the American 

Dream Commitment. It is a ten-year, $2 trillion pledge to increase homeownership rates and serve 

18 million American families. 

Conventional loan limit increases to $275,000. 

Source: Adapted from Fannie Mae Web site, www.fanniemae.com 

Franklin D. Raines 

Franklin Delano (“Frank”) Raines, ranked number four on Fortune magazine’s list of 50 

most powerful black executives 2 , was born the fourth of seven children in inner-city 

Seattle. Raines began his success early, as student body president and state debate 

champion. After graduating from Harvard University in 1971 magna cum laude, he 

attended Oxford University as a Rhodes Scholar between 1971 and 1973. In 1976, Raines 

received a law degree from Harvard. 

After law school, Raines spent two years as Associate Director for Economics and 

Government in the Office of Management and Budget (OMB) and Assistant Director of 

the White House Domestic Policy Staff. He then transitioned into the private sector, 

joining the investment banking firm Lazard Freres & Co., became a General partner and 

remained there for 11 years. When Raines left Lazard in 1991, it was to take the post of 

Vice Chairman at Fannie Mae. But the public sector would soon be calling Raines back -five 

years into his career at Fannie Mae, he accepted the position of Director of OMB 

under President Clinton. In this role, Raines championed the first successful effort to 

balance the budget in thirty years, and despite his success in the White House and 

Clinton’s suggestion that he consider other Administration posts, Raines was resistant to 

the idea. 

What did tempt Raines, however, was the opportunity to return to Fannie Mae. He 

commented at the time, “It’s a unique opportunity for me to combine the power of the 

private markets with a public purpose as important as home ownership.” 3 Raines became 

Chairman and CEO-designate of Fannie Mae in 1998 and CEO in January 1999, 

becoming one of the first black CEOs of a Fortune 500 company. 

Raines served on several corporate boards, including those of AOL Time Warner Inc., 

PepsiCo, and Pfizer Inc, and on the boards of the Enterprise Foundation and the National 

Urban League. He was elected a Fellow of the American Academy of Arts and Sciences 

and was a member of several prominent policy organizations, including the Council on 

Foreign Relations, the Trilateral Commission, and the Business Roundtable. 



Passionate about Fannie Mae’s mission of putting the American Dream of homeownership 

within reach for millions of Americans and also committed to upholding his company’s 

financial strength, Raines worked tirelessly to keep Fannie Mae’s mission and financial 

objectives aligned and ensure that the company communicated with one voice to both 

shareholders and policymakers. In his masterful ability to defuse Fannie Mae’s critics and 

cultivate strong political allies in Washington, Raines had been described as wielding an 

“iron fist in a velvet glove.” Other characterizations of Raines were warmer – one longtime 

friend and associate of Raines noted that “People realize that he has a seriousness of 

purpose and concern that wins them over to his cause.” 4 

Background on the U.S. Housing and Mortgage Markets 

Raines frequently referred to housing in the United States as (i) the leading consumer 

product, (ii) the leading consumer investment, and (iii) a leading economic driver. Indeed, 

the U.S. housing market provided a key source of stability to the economy following the 

bursting of the “Internet bubble” in March of 2000. Housing’s robust growth was fueled 

by declines in the 30-year fixed mortgage rate to a low of 6.56% at the end of 2001. 5 

HUD’s 2001 annual report announced that new home sales, existing home sales, and 

homeownership all set new records that year. 

The mortgage market in the United States was large, liquid, and thriving. In 2001, total 

residential mortgage debt outstanding in the U.S. totaled $6.2 trillion, up from $3.7 

trillion in 1995. 6 According to the Federal Reserve and the Bureau of Economic Analysis, 

over the past three decades total residential mortgage debt outstanding grew at an 

annualized rate that was 2.3 percentage points greater than the annualized rate of nominal 

GDP growth. 

Home mortgages were originated by a variety of financial institutions including thrifts, 

commercial banks, mortgage companies, and credit unions. In many cases, consumers 

hired mortgage brokers to identify the best lender and facilitate the mortgage transaction. 

But consolidation had concentrated much of the mortgage origination business in the 

hands of a few large institutions. In 2000, 25 institutions originated more than half of 

all loans. 7 

In a speech Raines delivered in early 2002, he was optimistic about industry growth rates. 

“We think the industry is going to originate, over the next ten years, $16 trillion in 

mortgages,” said Raines. “Sixteen million new homes are going to be constructed.” 8 He 

went on to assert that mortgage debt outstanding would grow significantly faster than the 

economy as a whole, estimating a growth rate of between eight and ten percent. 9 

And as interest rates dropped, millions of consumers opted to refinance their outstanding 

mortgages. In 2001, some seven million homeowners refinanced their mortgages, with 

over half taking out cash in the process. Fannie Mae estimated the cash generated by these 

refinancings at $80 billion, a significant infusion of capital into an otherwise sluggish 

economy. 10 



Fannie Mae’s Products and Services 

Fannie Mae defined its market as “mortgage debt outstanding” – the market for 

mortgages on peoples’ homes. In this market, Fannie Mae engaged in two principal 

activities: (1) purchasing mortgages for its own portfolio from lenders, thus providing 

them with additional funds to make available to borrowers, and (2) guaranteeing timely 

interest and principal payments on mortgage-backed securities (MBS) that lenders held or 

sold to investors. Fannie Mae referred to these two activities as its portfolio business (i.e., 

management of interest rate risk) and its credit guarantee business (i.e., management of 

credit risk.) 

Because Fannie Mae’s charter directed it to focus on low- and middle-income Americans, 

Fannie Mae could purchase or guarantee only mortgages with principal amounts less than 

or equal to what was referred to as the conforming loan limit. In 2002, the conforming 

loan limit for single-family homes was $300,700. Loans eligible for purchase or guarantee 

by Fannie Mae were referred to as “conforming” loans. Those above the limit were 

referred to as “jumbo” loans. 

In the credit guarantee business, lenders originated mortgages with consumers and then 

“swapped” those loans for a Fannie Mae MBS (a security backed by a bundle of several 

mortgages.) In exchange for a fee, Fannie Mae assumed the credit risk on the underlying 

loans and guaranteed timely payment of interest and principal on them. The lender could 

then hold those MBS or sell them to investors. 

Fannie Mae’s credit guarantee business was made up of the Single Family and Multifamily 

business units. Single-family referred to the purchase of loans made on single-family 

homes. Fannie Mae’s Multifamily business provided financing options on rental housing 

with five or more units or apartments through a network of lenders. Fannie Mae’s single 

family and multifamily business divisions maintained the responsibility for single family 

and multifamily minority lending volume. Fannie Mae also acted as a catalyst for 

community development and expanding homeownership in neighborhoods across the 

nation through its National Community Lending Center. The National Community 

Lending Center developed and maintained non-traditional relationships throughout the 

community and engaged in research and development on new products to further the 

minority lending initiative. 

Fannie Mae offered additional services to lenders and others for a fee, including issuing 

certain types of MBS and credit enhancements, and providing technology for underwriting 

loans. 

Because Fannie Mae could not, by law, originate loans, the company had to achieve its 

goal of increasing homeownership by working through the lenders who originated 

mortgages. In 1994, as part of Fannie Mae’s Trillion Dollar Commitment pledging $1 

trillion in targeted housing finance to serve 10 million low- to moderate-income families, 

Fannie Mae launched its Partnership Office initiative, aimed at creating on-the-ground 

“laboratories” in different areas of the country to test the effectiveness of innovative 

mortgage products, investment tools, and lender partnerships. Fannie Mae got most of its 

business from commercial banks, thrifts, mortgage banking companies, and credit unions. 



Exhibit 2: Fannie Mae’s Portfolio and MBS Businesses 

Source: Fannie Mae 

Competition 

Fannie Mae competed for the purchase of mortgage loans for its portfolio and the issuance 

of MBS in the secondary mortgage market. For single-family guarantee products, Fannie 

Mae competed with Freddie Mac, the Federal Home Loan Bank System, commercial 

banks, thrifts, pension funds, insurance companies, securities dealers, and other financial 

entities that purchased single family home loans for their portfolios or sold them to 

investors as MBS or whole loans. Fannie Mae also competed with the FHA insurance 

program for the credit guarantee of home loans and, with Ginnie Mae for the 

securitization of FHA loans. 

Because banks and thrifts had a short-term deposit base, traditionally these institutions 

held more adjustable rate mortgages (ARMs) and home equity loans than Fannie Mae, 

whose mortgage portfolio was made up primarily of long-term fixed-rate mortgages. 

Commercial banks and thrifts, however, are the largest participants in the mortgage 

industry and increased concentration among depositories in the past decade had increased 

their bargaining power in negotiations with Fannie Mae. 

At year-end 2001 Fannie Mae’s market share for owning residential mortgages was 

approximately 11 percent. The following chart shows Fannie Mae’s market share among 

other primary holders of residential mortgage assets. 



Exhibit 3: Holders of Residential Mortgage Assets 

($6.2 trillion as of December 31, 2001) 

* “Other" includes Federal Home Loan Banks, mutual funds, REITs, MBS dealer inventory, and other mortgage debt holders not 

elsewhere classified. Source: Federal Reserve, Inside MBS & ABS, FDIC, OTS, Fannie Mae, Freddie Mac 

Fannie Mae competed on the basis of price, products, and services offered. Fannie Mae 

also competed with Freddie Mac, the Federal Home Loan Bank System, and other entities 

for funds raised in the debt markets. While estimates varied, Fannie Mae and Freddie Mac 

were said to make possible, by virtue of their portfolio and guarantee activities, a discount 

of a quarter- to a half-percentage point on the interest rate on a 30-year conforming 

mortgage which was passed on to the consumer. 

Financial Profile 

Fannie Mae’s chief sources of revenue came from its two principal business activities: in 

the mortgage portfolio business, Fannie Mae bought and held mortgages and mortgagebacked 

securities and funded this activity by issuing debt in the global capital markets. 

Fannie Mae earned the spread between the yield on the mortgages held in portfolio and its 

cost of funds. 

In the mortgage guaranty business, lenders exchanged loans for MBS guaranteed by 

Fannie Mae for which it earned a fee for guaranteeing the lenders timely interest and 

principal payments on those MBS regardless of what happened to the underlying 

mortgages. Fannie Mae made about two-thirds of its profits from its mortgage portfolio 

business, earning around 100 basis points annually on mortgages held in portfolio versus 

approximately 20 basis points on MBS outstanding. 



Risk Management 

Key to maintaining financial soundness for Fannie Mae was managing the risks associated 

with the company’s two primary businesses. As CFO Tim Howard explained at a financial 

services conference in early 2002, “Our two main risks are interest rate risk and credit 

risk. We have unmatched tools and a highly disciplined set of processes for managing 

these risks. As a consequence, our earnings are little affected by movements in interest 

rates or changes in the economic environment.” 11 

For Fannie Mae’s portfolio of mortgages, interest rate risk management was critical. Most 

of the mortgages the company held were fixed-rate mortgages that the homeowner could 

keep for up to 30 years, or prepay at any time. Generally, Fannie Mae attempted to fund 

its mortgage assets with liabilities with similar cash flow patterns through time and across 

different interest rate paths (taking into account expected pre-payments by homeowners 

who refinanced or sold their homes). When interest rates fell, the duration of mortgages 

fell, and when interest rates rose, the duration of mortgages rose. If the duration of the 

mortgages changed faster than Fannie Mae could adjust the duration of its debt, Fannie 

Mae reported a “duration gap.” Fannie Mae’s practice was to rebalance the duration of its 

assets and liabilities quite gradually when the duration gap was within +/- six months, and 

to rebalance more aggressively when the duration gap was outside that range. 

Fannie Mae created callable agency debt in 1987 as a way to enhance its funding 

flexibility. With callable debt, in a refinancing environment where many of the mortgages 

in Fannie Mae’s portfolio were replaced by lower interest rate loans, the company could 

call (redeem) a portion of its debt and issue new debt at lower rates, reducing its own cost 

of funds to compensate for the lower yield it earned on its mortgage portfolio. Fannie Mae 

also used derivative products to manage interest rate risk -- particularly interest rate swaps 

and options. 

Because hedging interest rate risk with derivatives or callable debt entailed costs, however, 

Fannie Mae hedged only about half of its pre-payment risk, relying on its ability to 

rebalance the portfolio duration by adjusting its mix of debt. 

For Fannie Mae’s credit guarantee business, credit risk management was key. The 

company pursued a number of strategies to keep default losses low on the mortgages it 

owned and guaranteed. For one, Fannie Mae closely managed single-family loans to 

minimize both the frequency of foreclosure and the severity of loss in the event of a 

foreclosure. Fannie Mae’s loan management strategy involved payment collection 

guidelines and work rules designed to minimize the number of borrowers who fall behind 

on their obligations and help borrowers who are delinquent from falling further behind on 

their payments. Fannie Mae created a default prediction model to monitor the 

performance and risk of each loan and identify loans requiring problem management. In 

2001, over 80% of the company’s single-family loans were evaluated by the model. Fannie 

Mae also pursued various resolutions of problem loans as an alternative to foreclosure 

including repayment plans and loan modifications. In 2001, these loan workouts outpaced 

foreclosed property acquisition for the third year in a row. 



Fannie Mae’s charter also required that any mortgage loans it purchased with an unpaid 

principal balance (UPB) of over 80 percent of the value of the home have some form of 

credit enhancement (the most common type being mortgage insurance). Fannie Mae had 

additional credit policies and standards for all mortgages it purchased or guaranteed with 

a view toward minimizing the potential for borrower default. 

Fannie Mae worked to mitigate risk during the origination process through underwriting 

guidelines and, more recently, through the automated underwriting software it made 

available to lenders. The company’s automated underwriting software, Desktop 

Underwriter (DU), was designed to apply Fannie Mae’s underwriting standards to 

prospective borrowers and to capture a complete picture of the credit risk associated with 

loans as they were originated. As the precision of Fannie Mae’s risk assessment capabilities 

increased, loans to borrowers who formerly obtained financing in higher-cost markets 

became eligible for purchase by Fannie Mae. In many instances, the sale of these loans to 

Fannie Mae required payment of risk-based guaranty fees or price adjustments by lenders 

as additional credit risk compensation. 

The company relied on the geographic diversification of its book of business to protect 

itself from significant losses due to regional economic downturns. For 2001, Fannie Mae’s 

credit loss ratio was .006 percent, down from .007 percent in 2000 and far below the 

average credit loss ratio for banks (0.22percent). 12 

Financial results 

In February 2002, Fannie Mae’s stock price traded between $75 and $80 per share. For 

most of 2001, Fannie Mae’s stock had traded in a range of $75 to $85. In 2001, Fannie 

Mae’s operating earnings per share grew by 21 percent over the previous year, making the 

company one of only three in the S&P 500 Index to generate double-digit operating 

earnings per share growth for each of the previous 15 years. 13 

In the company’s 2001 annual report, CFO Timothy Howard explained Fannie Mae’s 

superior performance record came from Fannie Mae being “at the center of a large and 

growing market – residential mortgages. We are the low-cost provider in that market, and 

we manage our business risks exceptionally well.” 

Fannie Mae’s minimum and risk-based capital standards were established in 1992 when 

OFHEO was created to regulate its safety and soundness. The risk-based standard 

determined the amount of capital Fannie Mae must hold to withstand the effect of 

simultaneous interest rate and credit shocks over a ten-year period, in addition to another 

30 percent to cover management and operations risk. 14 OFHEO set the minimum capital 

amount at two and one-half percent of assets and 45 basis points of off balance sheet 

guarantees. The higher of the minimum or risk-based standard is binding. Fannie Mae met 

OFHEO’s capital standards in every year since the standards were established. 

Growth Prospects 

In 2001, Fannie Mae’s combined book of business (loans held in its portfolio and loans 

guaranteed) grew faster than the economy and faster than the residential mortgage market 

for the 20 th consecutive year, growing by 19 percent versus 10.3 percent. 15 Some of Fannie 



Mae’s competitors argued that if this trend were to continue, the company would run out 

of room to grow and be forced into other businesses to maintain earnings, encroaching on 

competitors. But at the end of 2001, Fannie Mae’s mortgage portfolio accounted for only 

11 percent of total outstanding mortgages. The company viewed this statistic as testament 

that it had continued “room to grow” in its charter-mandated businesses, and Raines 

stated that “Even if we grow faster than the market, we’ll still own maybe 15 percent of 

all loans at the end of the decade.” 16 

Raines maintained an optimistic outlook for growth in the mortgage market: in fact, 

Fannie Mae estimated that by the year 2010, consumer demand for single family mortgage 

credit would more than double from $5.4 trillion to $11 - $14 trillion. 17 This projection 

was based on the implications of census data on population growth for homeownership 

rates, projections that home values would continue to rise, and estimates that consumers 

would continue to increase how much of their home they chose to finance with mortgage 

credit. The average ratio of mortgage debt to home value (referred to as the “debt-to-value 

ratio”) grew from approximately 20 percent in the 1950s to nearly 50 percent by 2001. 

Raines attributed this trend to advances in automated underwriting technology and the 

success of mortgage insurance. “Low downpayment lending,” explained Raines, “has 

democratized homeownership in America.” 18 

Exhibit 4: Selected Housing Statistics and Projections 

Forecast Range* 

1970’s 1980’s 1990’s 2000’s 

Households 2.5% 1.5% 1.4% 1.3% 1.4% 

Homeownership Rate 0.2% (0.2)% 0.5% 0.5% 0.6% 

Average Nominal Hope Price Gains 10.2% 7.3% 3.6% 5.0% 6.5% 

SF Residential Investment 12.9% 8.6% 5.5% 6.8% 8.5% 

Debt-to-Value Ratio (0.3)% 2.0% 1.6% 1.3% 1.7% 

SF Mortgage Debt Outstanding 12.6% 10.6% 7.0% 8.1% 10.2% 

Sources: Bureau of the Census, Federal Reserve Board, OFHEO, National Association of Realtors; *Fannie Mae Forecast. 

** 1991-1995 growth was 2.0 percent; 1996-2000 growth was 5.3 percent. 

Fannie Mae’s Critics and Media Attention 

Like most large corporations, Fannie Mae had its share of tough critics and media 

attention. As a result of its business success, size, and role at the center of the housing 

sector of the economy, Fannie Mae was frequently the center of attention from both a 

business and political perspective. The media frequently picked up statements from Fannie 

Mae’s critics. 

Many of Fannie Mae’s critics worked through FM Watch, a private lobbying group 

formed in 1999 and made up of competitors who were concerned about Fannie Mae’s 



record of success and worried that the GSEs would increase competition and take business 

away from them. FM Watch was financed by the mortgage insurance industry, and top 

mortgage and sub-prime lenders. 

These companies used FM Watch as a vehicle to generate dissent about the GSEs’ 

activities. For example, FM Watch complained that the GSEs were moving beyond the 

functions permitted by their original charters into new business areas, such as non-prime 

mortgage lending, and complained that the GSEs were offering a cheaper alternative to 

sub-prime lending. FM Watch also complained that the GSEs were not buying enough 

mortgages made to minority and low- and moderate-income buyers. 

As FM Watch increased its activities from 1999 to 2002, public sector and media scrutiny 

of Fannie Mae increased. To some extent, this criticism also reflected an ideological 

objection to the GSE mission and the charter. Republican Representative Richard Baker of 

Louisiana, Chairman of the House subcommittee overseeing Fannie Mac and Freddie 

Mac, held hearings in 2000 and 2001 on the potential risk to taxpayers posed by the 

GSEs. 

FM Watch’s activities also led to heightened media attention. The Wall Street Journal 

editorial board, calling into question the existence of the GSE charter, published six fairly 

critical editorials about Fannie Mae and Freddie Mac between June 2000 and February 

2002. The GSEs were frequently mentioned in other publications as well over this period. 

Fannie Mae’s management was aware that shifts in strategy or business focus had the 

potential to raise concerns about the company’s risk exposure and its competitive position. 

Minority Lending at Fannie Mae 

Under the Federal Housing Enterprises Financial Safety and Soundness Act of 1992, HUD 

set explicit goals for Fannie Mae and Freddie Mac to promote affordable housing for 

moderate-, low-, and very low-income families and to provide financing for homebuyers 

and renters in underserved areas. Fannie Mae was required to report to Congress and 

HUD each year on its performance meeting the housing goals. Over the years, HUD 

steadily raised the goals and by 2001 had established the low and moderate-income 

housing goal at 50 percent of the total number of dwelling units financed by eligible 

mortgage purchases annually, the underserved areas housing goal at 31 percent, and the 

special affordable goal at 20 percent. Fannie Mae had met or exceeded HUD’s goals every 

year since the goals had been in place, and had launched a number of voluntary initiatives 

targeted at minorities under Raines’ leadership. For example, in 2000, Fannie Mae met its 

Trillion Dollar Commitment, a pledge to help finance over ten million homes for families 

“most in need” between 1994 and 2000. Between 1993 and 2001, Fannie Mae’s lending 

for African-American families increased over 190 percent, and over 210 percent for lowerincome 

families. 19 

Still, some critics faulted the company for trailing the rest of the private mortgage market 

in funding low-income and minority loans. In its October 31, 2000 Final Rule on the 

GSEs’ Affordable Housing Goals, HUD stated, "Research concludes that the GSEs have 

generally not been leading the market, but have lagged behind the primary market in 



financing housing for lower-income families and housing in underserved areas." 20 Often, 

the very divergent results Fannie Mae obtained on its minority lending progress versus 

HUD’s hinged on each organization using a different set of data to define the market 

Fannie Mae should be evaluated against. Fannie Mae contended that HUD’s analyses were 

not made on an “apples to apples” basis and that inaccurate assumptions went into 

HUD’s calculation. The problem for Fannie Mae remained that HUD’s conclusions, and 

not the company’s own, tended to be what appeared most prominently in the press. 

Minority lending had been and would continue to be a headline-grabbing issue just as it 

would remain central to Fannie Mae’s mission in the years to come. 

Characteristics of the Minority Lending Market 

A record 67.8% of American households were homeowners in 2001, yet even as 

homeownership in the United States reached an all-time high that year, fewer than half of 

African American and Hispanic families owned homes. What was behind this disparity? 

According to an annual Housing Survey conducted by Fannie Mae, minorities had a 

number of misconceptions about mortgage lending that often led them to believe that they 

would never qualify for a mortgage. For example, many of those surveyed believed that a 

perfect credit rating and five years in the same job were required to qualify for a mortgage. 

Many also believed that lenders, by law, had to offer them the best possible loan rate, and 

that mortgage brokers provided a better deal than banks or lenders. Thirty-nine percent of 

African Americans erroneously believed they needed a 20 percent down payment to take 

out a mortgage. 21 In brief, many minorities simply didn’t believe they could purchase a 

home. 

Yet demographic trends revealed great growth potential in this segment of the market: 

while minority homeownership rates in 2001 still lagged the national rate by 20% and the 

white homeownership rate by 25%, they were growing the fastest. By the year 2020, 

minorities were projected to make up more than half of all renters and a quarter of all 

owners. 22 

Other demographic trends were working against minorities. For example, the departure of 

higher-income households from central cities left many minority families in increasingly 

isolated and deteriorating areas. 23 Underserved by banks, many of which did not want to 

open branches in such areas, these individuals had to look elsewhere for home financing. 

Fannie Mae’s Market Research 

During Raines’ first tenure at Fannie Mae, his sights were already set on the issue of 

minority lending. He had worked with Fannie Mae’s National Community Lending 

Center on initiatives such as the Trillion Dollar Commitment to provide targeted housing 

finance to serve 10 million low- to moderate-income families. Starting with the Trillion 

Dollar Commitment, Fannie Mae had realized that having the right lender partners was 

critical to success. 

When Raines became Chairman in 1999, he regrouped with senior company leaders to get 

their perspectives on Fannie Mae’s key challenges, and the importance of reaching more 

minority borrowers resurfaced as a key concern. Raines decided to set up a cross- 



functional team to investigate some of the barriers that stood between minorities and 

fairly-priced mortgage funding. Raines wanted to understand what explained the disparity 

in homeownership between whites and minorities and what Fannie Mae could do to 

address it. 

Another thing Raines noted shortly after becoming Fannie Mae’s Chairman was that the 

company handled marketing differently than most of the companies on whose boards he 

served. While customer segmentation was standard procedure at companies like PepsiCo 

and AOL, Fannie Mae hadn’t analyzed the different needs of different segments of the 

population in a systematic way. Raines wanted to bring in a truly accomplished marketer 

to take a closer look at Fannie Mae’s marketing strategy and tactics and work on a 

program to really connect the consumer more directly to the company and its products. 

In particular, this approach would be critical to successfully penetrating the minority 

segment. 

Raines knew he’d found the right person for this job when he was introduced to Vada 

Hill. Hill had a background in consumer product marketing and advertising, with 

previous experience at Procter & Gamble, Ogilvy & Mather and BBDO, and as Taco 

Bell’s chief marketing officer. At Taco Bell, Hill was responsible for developing the 

renowned “Chihuahua” advertising campaign. 

Raines brought Hill in as Chief Marketing Officer, and soon thereafter, Hill was at work 

conducting market research on the minority lending market so that Fannie Mae could 

better understand the unique needs and challenges of this segment. Hill organized a 

nationally representative study in 1999 and 2000 designed to determine what motivates 

minority consumers in the mortgage and financial arenas. A 19-page questionnaire was 

distributed to 9,300 households of adults over 25 years of age with household incomes 

greater than $30,000 covering attitudes and behaviors relating to banks and financial 

institutions, creditworthiness, technology, and mortgage products. 24 

This research affirmed that the mortgage industry’s, as well as Fannie Mae’s, historical 

marketing approach did not speak to a large portion of the population, whose motivations 

and challenges were unique and different from those of most whites. According to Hill’s 

research, a high proportion of minority respondents felt “financially challenged” and also 

relied heavily on a friends and family network when in need of advice about financial 

services. This segment of the population also tended to believe their credit rating could be 

better than what it was and, consequently, that they’d have difficulty qualifying for a loan. 

Hill’s analysis also showed a high proportion of minority respondents reporting to be 

“living from paycheck to paycheck” (57% of African Americans and 53% of English 

Dominant Hispanics vs. 40% of Whites) and “frequently worried about my financial 

situation” (65% of Spanish Dominant Hispanics, 49% of African Americans vs. 39% 

of Whites.) 

In terms of channels, African American and Hispanic mortgage holders were also more 

likely to use a mortgage broker, and only 10% of African American mortgage holders and 

11% of Hispanic mortgage holders obtained their home loans from banks, traditionally a 

major channel to the borrower for Fannie Mae. 



Another theme that emerged from Fannie Mae’s research was the importance of the 

“trusted advisor.” In addition to their higher propensity than whites to use brokers, 

minorities tended to consider seriously the advice of a realtor when applying for a 

mortgage. Nearly one-third of both African Americans and English-dominant Hispanics 

surveyed chose a lender based on the recommendation of a real estate professional versus 

their own research. 

In short, the minority lending market was characterized by beliefs, needs, and behaviors 

that were very different from those of the “financially confident” consumers Fannie Mae 

had traditionally been able to appeal to through its proposition of being a low-cost 

provider. 

With this background in mind, the predominance of predatory lending in these markets 

seemed less surprising: many minority borrowers were so convinced that their credit was 

impaired and so fearful of being rejected by lenders that they were willing to pay 

extraordinarily high interest rates just to “get a yes.” Predatory lenders took advantage of 

this price-insensitivity, and what resulted was a large proportion of the least financially 

stable borrowers paying the highest rates for home loans and refinancings. 

While there was no single definition for “sub-prime,” the term generally referred to loans 

made to credit-impaired borrowers. “Prime” mortgages were generally viewed as 

mortgages made to lenders with credit considered to be good (typically A quality on a 

scale that runs from A to D.) Some sources reported that fifty to 60 percent of the subprime 

market were A- loans – that is, loans to borrowers with only slightly impaired 

credit. 25 Even as prime mortgage rates dipped below 7 percent in 2001, sub-prime rates 

ranged from 10 to 12 percent, which would add $300 a month to the mortgage payment 

on a $160,000 home. 26 

The sub-prime (also referred to as nontraditional) lenders dominated the minority markets 

and were aggressive with their advertising — putting flyers on windshields, showing up for 

church services on Sunday, and otherwise making their presence and availability widely 

known. They knew the brokers that people in their communities worked with and spent 

time convincing them that they could get their clients a “yes.” 

While these lenders typically focused more on providing refinancings than on originating 

purchase mortgages, they did increase their share of home purchase mortgages from just 

one percent in 1993 to 13 percent in 2000. 27 Increased concern about predatory lending 

accompanied the growth in sub-prime lending, however, as predatory lending was often 

associated with sub-prime lenders. As with sub-prime lending, there was ambiguity about 

the definition of predatory lending, but Federal regulators defined it as involving one or 

more of the following elements: “unaffordable loans based on the borrower’s assets rather 

than his or her ability to pay, inducing a borrower to repeatedly refinance his mortgage so 

that the lender can charge high fees or points, engaging in fraud or deception to hide some 

of the costs of the loan.” 28 

To truly penetrate the minority lending market, Fannie Mae would have to take a different 

tack than it had long used to serve credit-confident consumers. Raines reflected on Hill’s 

research: “So we’ve learned a lot – including that price doesn’t characterize all consumers. 



Indeed, it probably characterizes only about 20 percent of consumers, for whom price is 

the most important feature of the product.” 29 Fannie Mae would have to think carefully 

about how to price its products in this very different competitive arena. 

Targeted Initiatives 

One of the major changes instituted when Raines took the helm of Fannie Mae from 

James Johnson was the creation of risk-based pricing for lower-rated borrowers. The 

company historically had taken the approach of using credit counseling to help borrowers 

with impaired credit work their way up to an A-level rating to be able to take out a 

mortgage. Raines decided to take a different approach. Raines wanted to give more 

minority borrowers that prized “yes” sooner in the process, and took the view that if 

loans were priced in accordance with their risk, that “yes” could indeed come a lot sooner. 

Raines believed that the highest barriers in minority lending were lack of information, lack 

of wealth, and lack of credit. 30 Determined to bring down each one of these barriers, 

Raines set to work on a series of initiatives that would attack each one at its root. 

In March of 2000, Fannie Mae announced its “American Dream Commitment” to break 

down these barriers and help close the home ownership gap between whites and minorities 

in the United States through a 10-year, $2 trillion commitment targeted at 18 million 

homebuyers and renters. The program consisted of a six-point plan designed to (1) 

promote mortgage consumer rights, including increased access to mortgage credit (the 

Mortgage Consumer Rights Agenda); (2) lead the housing market in serving minority 

borrowers, including a pledge to provide $420 billion in financing to 3 million minority 

households (the National Minority Home Ownership Initiative); (3) address the needs of 

women-headed households, new immigrants, seniors, young families, and urban and rural 

dwellers (the Opportunity for All Strategy); (4) invest more capital and expand Partnership 

Offices in inner city and older suburban areas (the America’s Living Communities Plan); 

(5) lower the costs of mortgage financing by providing lenders and consumers with new 

technologies (eHomeownership); and (6) increase the supply of affordable rental housing 

(the Affordable Rental Housing Leadership Initiative). 

Raines called the Mortgage Consumer Rights Agenda the “cornerstone” of the plan, 

saying, “Our $2 trillion in capital and focused mortgage strategies alone will not close the 

homeownership gap – not when so many families and neighborhoods remain out of reach 

of the mainstream financial system, where mortgage consumer rights can be protected 

better.” 31 

The Mortgage Consumer Rights Agenda was a set of five principles shared by Fannie Mae 

and its lending partners, including the right to access suitable mortgage credit, the right to 

know the true cost of a mortgage, and the right to the lowest cost mortgage for which a 

consumer can qualify. 

Fannie Mae’s Housing and Community Development business, headed by Rob Levin and 

its National Community Lending Center, would be a focal point for initiatives that 

focused on the minority market. This group worked with any entity within a community 

who was not a lender, such as churches and community development corporations. The 



division worked to find lending opportunities outside of mainstream channels, which 

permitted many more of Fannie Mae’s products to reach minorities. 

New Product Development 

Fannie Mae introduced several new products developed with the Mortgage Consumer 

Rights Agenda in mind, including its Expanded Approval mortgage product with Timely 

Payment Rewards option (the combined product is referred to as EA/TPR SM ) With 

Expanded Approval, Fannie Mae sought to make mortgage credit available to a wider 

swath of borrowers, even those with slightly blemished credit histories. The Timely 

Payment Rewards feature rewarded qualifying borrowers with an interest rate reduction of 

up to one percent after making timely mortgage payment for a specified period. 

EA/TPR allowed the borrower’s contribution towards down payment or closing costs to 

come from flexible sources such as gifts or unsecured loans from relatives, employers, 

public agencies, grants, non-profits, or secured borrowed funds. And the use of Fannie 

Mae’s automated underwriting software, Desktop Underwriter (DU), made loan approval 

quick and streamlined the documentation process. 

As Raines commented, “There are…people out there who are so financially distressed that 

simply getting a ‘Yes’ is the most important thing for them, and the faster you can get to 

‘Yes,’ the more quickly you’ve given them the major aspect of the product that they 

want.” 32 

DU played a critical role in making Expanded Approval a reality – the software allowed 

lenders to take a more comprehensive view of a borrower's creditworthiness, thus enabling 

them to offer credit to more borrowers with less-than-perfect credit. DU also let potential 

borrowers know very quickly whether or not they qualified. In 2001, Fannie Mae 

processed over 25 million loan submissions through DU. 33 

Fannie Mae also installed educational tools on its Web site such as the True Cost 

Calculator, which consumers could use to estimate all of the costs involved in obtaining a 

mortgage, determine how much they could afford, and what their monthly payments 

would be based on information they provided. 

But Fannie Mae would not consider itself successful in stimulating minority 

homeownership unless people who obtained mortgages were also able to stay in those 

homes. Because many first-time mortgage borrowers had very little in the way of financial 

“cushioning,” often living paycheck-to-paycheck, unexpected illnesses or job losses could 

put their mortgages in jeopardy if they were unable to make their monthly payments. 

The Marketing Challenges of Minority Lending 

Fannie Mae’s greatest challenge in stimulating minority lending, however, was that the 

company did not control the channel to the consumer. Rather, Fannie Mae was dependent 

upon lenders for the mortgages they purchased, and many “mainstream” lenders had no 

physical presence in some of the neediest areas. And while Fannie Mae could count on the 

fact that banks had community reinvestment goals to meet, the additional obstacle 

remained that many minority borrowers did not go to banks for mortgage financing. 

Almost certain they’d be denied funding at a bank, many preferred not to put their self- 



esteem on the line by even applying for a mortgage there, especially when they knew they 

could get a “yes” from sub-prime or predatory lenders. Price was not as important to them 

as maintaining a sense of self-worth. 

Raines recognized that if Fannie Mae was going to provide incentives for more lenders to 

make more loans to historically underserved areas, the company would have to help those 

lenders understand and penetrate this segment of the market and their unique needs. But 

the more avenues Fannie Mae pursued to obtain information about consumers and 

understand how to reach consumers -- helping the company to develop better products 

and lenders reach these consumers -- the more suspicious the lenders became. Fannie Mae 

was getting too close to the consumer for some lenders’ comfort. Even when Fannie Mae 

conducted limited corporate advertising aimed at impressing business customers, opinion 

leaders, and the financial community with the company's role in facilitating the American 

Dream, lenders worried that Fannie Mae was trying to establish brand identity with the 

public in preparation for a day when it would compete with lenders by originating 

mortgages. 

And penetrating these underserved minority markets had infrastructure implications, both 

physical and technological, for lenders. In addition to thinking about building branches in 

underserved areas, they would need to use new credit models and educate staff on what 

messages would resonate with this consumer segment. 

To make matters worse, heavy refinancing activity was already providing many lenders 

and brokers with as much business as they could handle. Getting them to focus on 

bringing Fannie Mae’s mortgage products to a new set of consumers would prove a tough 

task. 

Fannie Mae’s Future 

As he ended the telephone conversation with his speechwriter, Frank Raines’ mind was 

racing. He was confident that penetrating the minority lending market would be a key 

strategic issue for Fannie Mae in the coming years. But given that some critics contended 

that Fannie Mae was already a "risky" enterprise, how would a focus on a market 

characterized by more credit-impaired borrowers play in the court of public opinion? 

Would they see this shift as adding to the credit risks inherent in Fannie Mae's huge 

guarantee business? Or could Raines get them to view it as an opportunity that would 

meet both Fannie Mae's social and financial obligations, as he himself viewed it? 

As Raines summarized, “We need a business solution to a mission issue in an environment 

where you can’t wish away any of the problems.” 34 



Case Questions 

1. Develop a strategy for Frank Raines, both within his organization and with Fannie 

Mae’s lender partners, to increase minority lending. Include in your recommendation: 

a. How can Fannie Mae encourage lenders to enter some of the minority markets 

most in need of its services? 

b. How can minority borrowers be encouraged to trust mainstream financial 

institutions? 

c. How should Fannie Mae adjust its products and processes to better reach minority 

borrowers and manage the risks in serving a broader credit spectrum? 

2. Develop a marketing strategy for Fannie Mae, understanding that the company cannot 

sell directly to consumers, that would help enhance the minority lending effort. 

3. What kinds of responses might Fannie Mae’s critics have if it continues to aggressively 

penetrate the minority lending market? What advice would you give Frank Raines on 

how to preempt them? 



1 Housing & Urban Development Web site, http://www.hud.gov/offices/hsg/gse/gse.cfm, retrieved on March 10, 

2003. 

2 Author not given, “Most Powerful Black Executives,” Fortune, July 22, 2002, retrieved on April 13, 2003 from 

http://www.fortune.com/fortune/blackpower. 

3 James Peterson, “Fannie Mae’s Franklin Raines: ‘We believe in big goals,’” ABA Banking Journal, January 2000, 

p. 36. 

4 Paula Farmer, “The First African American to Head a Fortune 500 Company, Franklin D. Raines, Takes Over 

Fannie Mae,” The Black Collegian Online, August 1999, retrieved January 10, 2003 from http://www.blackcollegian.com/issues/1999-08/fdraines.shtml. 

5 Federal Housing Finance Board, Web site, www.fhfb.gov, retrieved on March 10, 2003. 

6 Board of Governors of the Federal Reserve System, Flow of Funds Accounts of the United States. 

7 “The State of the Nation’s Housing 2002,” Report of the Joint Center for Housing Studies of Harvard University, 

p. 15. 

8 Excerpts of remarks by Franklin D. Raines, “Eliminating Barriers to Homeownership,” Hyatt Regency Crystal 

City, Arlington, VA, February 22, 2002. 

9 Ibid. 

10 “The State of the Nation’s Housing 2002,” p. 7. 

11 Remarks delivered by Timothy Howard, “The Case for Investment in Fannie Mae,” Credit Suisse First Boston 

Financial Services Conference, Dana Point, CA, February 11, 2002. 

12 Federal Deposit Insurance Corporation (FDIC) “Quarterly Banking Profile, Fourth Quarter 2001.” 

13 Fannie Mae 2001 Annual Report, p. 2. 

14 “Government-Sponsored Enterprises,” p. 1207, retrieved January 31, 2003 from the White House Web site, 

http://www.whitehouse.gov/omb/budget/fy2003/pdf/app36.pdf. 

15 Janice Revell, “Fannie Mae is Plenty Safe,” Fortune.com, May 12, 2002, retrieved January 12, 2003 from 

http://www.fortune.com/fortune/print/0,15935,367245,00.html? 

16 Ibid. 

17 Remarks delivered by Franklin D. Raines at the Securities Industry Association, Boca Raton, FL, November 8, 

2002. 

18 Ibid. 

19 Remarks delivered by Franklin D. Raines at the National Association of Home Builders’ 2002 International 

Builders Show, Atlanta, GA, February 9, 2002. 

20 “President Bush's Budget to Congress Underscores How Fannie Mae and Freddie Mac Lag Private Lenders in 

Financing Loans to African-Americans and Hispanics,” FM Watch Press Release, February 12, 2002, retrieved 

March 10, 2003 from FM Watch Web site, http://www.fmwatch.org/news//2002-02-12.124.phtml. 

21 “The Growing Demand for Housing: 2002 Fannie Mae National Housing Survey,” available on Fannie Mae Web 

site, http://www.fanniemae.com/global/pdf/media/survey/survey2002.pdf, p. 3. 



24 Fannie Mae internal document, “Understanding Consumers in the Mortgage Arena,” January 16, 2003. 

25 Allen J. Fishbein, “Going Subprime,” Shelterforce Online, Issue #125, September/October 2002, retrieved on 

January 31, 2003 from http://www.nhi.org./online/issues/125/goingsubprime.html. 

26 Fannie Mae American Dream Commitment 2001 Report, p. 1. 


28 Marcy Gordon,“High –cost loans costing $9.1 billion a year, report estimates,” Associated Press Newswires, 

July 25, 2001. 

29 Excerpts of remarks by Franklin D. Raines, “Eliminating Barriers to Homeownership,” Hyatt Regency Crystal 

City, Arlington, VA, February 22, 2002. 

30 Interview with Franklin D. Raines, February 25, 2003. 

31 “Fannie Mae’s $2 Trillion ‘American Dream Commitment’ On Course with Over $190 Billion in 2000 Targeted 

Lending,” Business Wire, March 14, 2001. 

32 Excerpts of remarks by Franklin D. Raines, “Eliminating Barriers to Homeownership.” 

33 Fannie Mae company document, “Fannie Mae at a Glance,” October 2002, p. 9. 

34 Interview with Franklin Raines, February 25, 2003. 


Statements of Income 

Financial Statements and Reports 

Year Ended December 31, 

Dollars and shares in millions, except per common share amounts 

Interest income: 

2001 2000 1999 

Mortgage portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $46,478 $39,403 $32,672 

Investments and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,692 3,378 2,823 

Total interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

Interest expense: 

49,170 42,781 35,495 

Short-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,897 4,204 3,952 

Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35,183 32,903 26,649 

Total interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41,080 37,107 30,601 

Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

Other income: 

8,090 5,674 4,894 

Guaranty fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,482 1,351 1,282 

Fee and other income (expense) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 151 (44) 191 

Total other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

Other expenses: 

1,633 1,307 1,473 

Provision for losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (115) (120) (120) 

Foreclosed property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 193 214 247 

Administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,017 905 800 

Special contribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 300 — — 

Purchased options expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 — — 

Total other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

Income before federal income taxes, extraordinary item and cumulative effect 

1,432 999 927 

of change in accounting principle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,291 5,982 5,440 

Provision for federal income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,224 1,566 1,519 

Income before extraordinary item and cumulative effect of change in accounting principle . . . . . . . 

Extraordinary item-(loss) gain on early extinguishment of debt (net of tax benefit 

of $183 million in 2001, tax expense of $17 million in 2000, and tax benefit of 

6,067 4,416 3,921 

$5 million in 1999) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (341) 32 (9) 

Cumulative effect of change in accounting principle, net of tax effect . . . . . . . . . . . . . . . . . . . . . . . . . . 168 — — 

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,894 $ 4,448 $ 3,912 

Preferred stock dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 138 121 78 

Net income available to common stockholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,756 $ 4,327 $ 3,834 

Basic earnings per common share: 

Earnings before extraordinary item and cumulative effect of change in accounting principle . . . $ 5.92 $ 4.28 $ 3.75 

Extraordinary (loss) gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (.34) .03 — 

Cumulative effect of change in accounting principle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17 — — 

Net earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

Diluted earnings per common share: 

$ 5.75 $ 4.31 $ 3.75 

Earnings before extraordinary item and cumulative effect of change in accounting principle . . . $ 5.89 $ 4.26 $ 3.73 

Extraordinary (loss) gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (.34) .03 (.01) 

Cumulative effect of change in accounting principle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17 — — 

Net earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5.72 $ 4.29 $ 3.72 

Cash dividends per common share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

Weighted-average common shares outstanding: 

$ 1.20 $ 1.12 $ 1.08 

Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,000 1,003 1,024 

Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,006 1,009 1,031 

You should refer to Fannie Mae's full 2001 Annual Report for a complete copy of Fannie Mae's audited financial statements, including the notes to the financial statements.

Balance Sheets 

December 31, 

Dollars in millions, except share stated values 

Assets 

2001 2000 

Mortgage portfolio, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

Investments: 

$705,167 $607,399 

Held-to-maturity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38,671 33,832 

Available-for-sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35,883 21,136 

Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,518 617 

Accrued interest receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,705 4,529 

Acquiredproperty and foreclosure claims, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 684 636 

Derivatives in gain positions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 954 — 

Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,209 6,923 

Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $799,791 $675,072 

Liabilities and Stockholders’ Equity 

Liabilities: 

Debentures, notes and bonds, net: 

Due within one year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $343,492 $280,322 

Due after one year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 419,975 362,360 

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 763,467 642,682 

Accrued interest payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,529 8,236 

Derivatives in loss positions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,069 — 

Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,608 3,316 

Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 781,673 654,234 

Stockholders’ Equity: 

Preferred stock, $50 stated value, 100 million shares authorized—46 million shares issued . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,303 2,278 

Common stock, $.525 stated value, no maximum authorization—1,129 million shares issued . . . . . . . . . . . . . . . . . . . . . . . . 593 593 

Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,651 1,588 

Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,175 21,619 

Accumulated other comprehensive income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (7,065) 10 

23,657 26,088 

Less: Treasury stock, at cost, 132 million shares in 2001 and 130 million shares in 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,539 5,250 

Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,118 20,838 

Total liabilities and stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $799,791 $675,072 


Statements of Cash Flows 

Year Ended December 31, 

Dollars in millions 

Cash flows from operating activities: 

2001 2000 1999 

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

Adjustments to reconcile net income to net cash 

provided by (used in) operating activities: 

$ 5,894 $ 4,448 $ 3,912 

Amortization of discount/premium . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,561 10,025 7,730 

Negative provision for losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (115) (120) (120) 

Gain (loss) on early extinguishment of debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 524 (49) 14 

Cumulative effect of change in accounting principle (net of tax) . . . . . . . . . . . . . . . . . . . . . (168) — — 

Purchased options expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 — — 

Other (decreases) increases, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,032) (913) 1,307 

Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,701 13,391 12,843 

Cash flows from investing activities: 

Purchases of mortgages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (270,609) (152,075) (193,434) 

Proceeds from sales of mortgages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,967 10,599 5,950 

Mortgage principal repayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 164,408 56,568 77,402 

Net proceeds from disposition of foreclosed properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,035 2,019 2,462 

Net (increase) decrease in held-to-maturity investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4,839) (12,172) 20,639 

Net (increase) in available-for-sale investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (14,770) (3,057) (1,847) 

Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (114,808) (98,118) (88,828) 

Cash flows from financing activities: 

Proceeds from issuance of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 249,454 110,298 138,491 

Payments to redeem long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (196,931) (50,320) (62,464) 

Proceeds from issuance of short-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,746,381 1,130,698 1,129,246 

Payments to redeem short-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,690,805) (1,104,694) (1,125,754) 

Net payments to purchase or settle hedge instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (5,569) (1,245) (629) 

Net payments from stock activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,522) (1,492) (1,549) 

Net cash provided by financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101,008 83,245 77,341 

Net increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 901 (1,482) 1,356 

Cash and cash equivalents at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 617 2,099 743 

Cash and cash equivalents at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,518 $ 617 $ 2,099 

Supplemental disclosures of cash flow information: 

Cash paid during the year for: 

Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 40,361 $ 34,863 $ 28,447 

Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,088 1,595 1,276

Fannie Mae Case-GS - Tuck School of Business

You also want an ePaper? Increase the reach of your titles

Delete template?

Save as template?