Fannie Mae used to cut quite a figure.
Since her introduction by Uncle Sam at a debutante party in 1969, at the age of 31, Fannie attracted quite a bit of attention. She was a late-bloomer, to be sure. But Wall Street traders, in particular, found she had a real touch of glamor throughout the 1970s. She moved to a fabulous, Williamsburg-style mansion in Northwest Washington to receive her suitors and congressional watchdogs questioned her high-living style.
The things people are saying today are whispered, because they are not flattering. Fannie is suffering the pressures of record interest rates and questions have been raised about her survival, a matter of large consequence for the U.S. economy because of Fannie's huge impact on the housing and money markets.
Fannie Mae is the popular nickname of Federal National Mortgage Association, a Washington corporation traded on the New York Stock Exchange and the nation's largest single owner of housing mortgages. It was a government agency before being transferred to the private sector in the Nixon administration.
Overall, in 1982, Fannie Mae Chairman David O. Maxwell said his firm will borrow up to $15 billion in the capital markets--the largest amount by any business. The new money will pay off $8.3 billion of maturing debentures sold in earlier years (average rate of 10.35 percent) and finance new mortgage acquisitons--the company's raison d'e tre.
However, just as the housing industry and savings associations have been plunged into their worst crisis since the Great Depression, so Fannie Mae is suffering the ignominy of operating with a continuous string of net losses for which no end is in sight. For those people who appreciate irony, Fannie Mae was born in Franklin Roosevelt's administration and given a goal of helping to provide more funds for mortgages to house a depressed nation. Another irony is that in the last decade, Fannie Mae critics complained the company made too much money.
The goal of aiding housing has been met and the company's $60 billion mortgage portfolio represents the level of funds that have been made available to primary lenders to make additional mortgages.
But last week, Fannie Mae reported its first yearly loss ever after four consecutive quarterly losses. The 12-month loss of $190.4 million came as no surprise to government and investment analysts who have been watching the company in recent years, as profits declined steadily from $209 million in 1978 to $162 million in 1979 and a slim $14 million in 1980.
Maxwell said that even though fourth-quarter losses were less than the previous quarter, with a slight decline of interest rates, "we aren't out of the woods yet . . . 1982 certainly won't be profitable." As E. F. Hutton analyst Michael Lewis said: "The future is really out of Fannie Mae's hands."
But Maxwell also emphasized, in an interview, that Fannie Mae owns enough riches from earlier years of very conservative and often-criticized management to weather the interest-rate storms until government policies bring inflation under control, as he thinks will happen.
At the end of the third quarter last year, Fannie Mae's debt of $57 billion carried an average cost of 11.52 percent, with an average maturity of two years and seven months. The mortgage portfolio was yielding 9.62 percent. That means Fannie Mae was paying 1.9 percentage points more to borrow money than it was taking in. In 1982, the mortgage yield will top 10 percent but high borrowing costs will remain; Fannie Mae sold a $1 billion debenture offering this month with an interest rate of 15.05 percent.
What gives solace to Maxwell, who took over the stewardship of Fannie Mae last year after serving as chairman of Ticor Mortgage Insurance Co. and as general counsel of the Housing and Urban Development department before that, is some $1.3 billion of stockholders' equity remaining as of last Sept. 30. Well over half of that total is "retained earnings," or money kept by management out of earlier profits.
Given a worst-case scenario, with interest rates remaining at historically high levels over the next few years, these retained earnings could be swallowed up by operating losses just as many savings and loan associations or mutual savings banks saw their once-handsome stash of reserves to cover possible losses disappear in 1981--forcing a takeover by another institution.
In the case of Fannie Mae, with no changes in the current economic climate, it would take probably four years before the company faced the prospect of running out of cash. That scenario presumes that the $71 million rate of loss in the recent quarter by Fannie Mae would continue indefinitely. And there could be no marriage of convenience in the case of Fannie Mae; the federal government would have to step in to prop it up or face money market chaos.
Maxwell doesn't think there is any chance this could happen and most Wall Street analysts agree, noting that Fannie Mae has been raising fees for its regular services and launching new programs designed to increase the return on its overall mortgage portfolio as well as to attract new, profitable business.
The FNMA chief has ordered a strategic planning effort to cover five years, "to define where Fannie Mae fits in the U.S. economy over the next decade." It's a first for the company and follows a thorough restructuring of the firm's management, with several key outsiders in addition to Maxwell. He also is planning to concentrate on making new programs work and to expand into rental housing programs.
"I'm not discouraged," Maxwell added. "I've never been terribly optimistic about 1982 . . . but we have the staying power."
The company's directors (10 elected by stockholders and five appointed by the president) apparently accept this. They voted last week to pay a dividend of 4 cents a share on common stock, the same rate as the previous quarter although far below the $1.28-per-share annual rate of 1979. Continuation of cash dividends for an unprofitable company and one that has no prospects of making a profit is a questionable practice, but company officials note that the cost of the small payout is less than $3 million a quarter and that elimination of the dividend altogether would make the company's stock totally unattractive.