October 30, 2000

Private companies have an important role to play in promoting the good of society, says Franklin Raines, chief executive officer of Fannie Mae, the nation's largest source of financing for home mortgages.

Raines described Fannie Mae, a New York Stock Exchange company that started out as a federal agency, as "a mediating structure that bends the financial system to create homeowners."

As a private company with a public mission, Fannie Mae supports more home ownership than either government or the free market alone would, he said, and it plays a pivotal role in the U.S. economy.

"In creating Fannie Mae, Congress recognized that more home ownership and affordable rental housing is better for families, communities and the country as a whole," he said.

Raines, who became CEO of the Federal National Mortgage Association - Fannie Mae - in 1999, was previously director of the federal Office of Management and Budget. He made his remarks during this year's Greenwich Capital Markets Inc. Economic Seminar, held at the Thomas J. Dodd Research Center on Wednesday.

Fannie Mae was established in 1938, in the Depression, as a federal agency to invest in the new 30-year self-amortizing mortgage. The 30-year mortgage was a new kind of loan intended to ensure that fewer borrowers would lose their homes.

During the Depression, he said, many families lost their homes because they had loans that required periodic refinancing. In light of the failure of so many lending institutions, often when the refinancing became due, there were no banks to do it.

In the late 1960s, Raines said, the government spun off Fannie Mae and set it up as a private company, seeking to tap market forces and private capital to help make home ownership more possible for the average American.

Although Fannie Mae does not make loans to individual customers, it does help keep down the cost of mortgages for consumers. After a bank has approved a loan for a consumer, he explained, it sells the loan to Fannie Mae, which in turn sells the loan to capital markets around the world. By moving the loan and the risk, the bank is able to finance more mortgages and pass on the savings to the home buyer.

"Essentially, Fannie Mae links the capital markets to Main Street," he said.

In countries such as France or Germany, Raines said, that don't have a robust secondary mortgage market, home buyers have to put down 40 percent to 50 percent of the price in cash and cannot get a fixed mortgage rate. "In America, you don't have to be rich to own a home," he said.

Raines said that when he was a college senior in 1971, the nation was a different place, divided over fundamental issues such as the Vietnam War, race, and the future of capitalism. Most people would have said it was the job of individuals or government - not corporations - to improve society, he said.

"Today, however, we live in a society where the boundaries of business and government are beginning to blur," Raines said. Now that free market democracy has swept across the world, he added, the debate of his college days is over.

"We have come to accept that government cannot and should not do it all," he said. "Corporations have a greater social responsibility today," and have begun to focus on "the creation of societal value beyond short-term quarterly profits."

In addition, there are now "mediating structures" that help meet social needs and mean that "the average guy is not buffeted by every swing in the market." Fannie Mae, said Raines, is one of those mediating structures, helping Americans achieve the goal of home ownership.

"For most Americans, home ownership is a major priority," he said. "It's not called the American dream for nothing." He cited a recent American Enterprise Institute report showing that for 88 percent of Americans, owning a home is the top priority, even ahead of having a happy marriage and having children.

He said 67 percent of Americans now own their own homes - the highest rate ever recorded - and the demand is increasing, cutting across differences such as race and economic status: "Young or old, the desire to own a home unites us all."

Home ownership is seen as the ticket to long-term financial security, he added, and as the key to stronger communities.

Yet home ownership is unevenly distributed in society, Raines said. He quoted the famous pronouncement by W.E.B. Du Bois, in The Souls of Black Folk in 1903, that the problem of the 20th century is the problem of the color line. Du Bois also observed that the size and arrangement of people's homes is an index of their condition.

"We have made great progress since then," Raines said, but "minorities have yet to achieve parity in home ownership in America."

Raines said 70 percent of white people own a home, but the figure is less than 50 percent for minorities, female headed households, and others, despite the current period of "unprecedented prosperity." Minorities, he said, are still often unserved and overcharged.

In the past 30 to 40 years, he said, various approaches have been tried to increase affordable housing for minority and lower income families.

In the early days of the movement, he said, there was a significant commitment of government funds. The state of Connecticut, for example, built and managed 8,000 units of affordable housing, including Stowe Village and Charter Oak Terrace in Hartford. But later, all over the country, government pulled back and eventually thousands of units of housing had to be torn down because they had become uninhabitable.

In the 1980s, public-private partnerships were seen as more effective.

Now, said Raines, more money is being invested in community development through private mechanisms, including Fannie Mae, which works through mainstream lenders to reach out to underserved communities.

During the 1990s, Fannie Mae pledged $1 trillion in capital over seven years to boost home ownership among underserved populations. Last spring, said Raines, the commitment was completed ahead of schedule, and Fannie Mae pledged a further $2 trillion to assist 18 million families during the next decade.

Elizabeth Omara-Otunnu