David O. Maxwell is chairman and chief executive officer of the Federal National Mortgage Association. The company, widely known as Fannie Mae, is a congressionally chartered, privately owned corporation whose business is to make a secondary market in mortgages.
Fannie Mae buys mortgages from lenders thus replenishing the lenders' supplies of funds so that they can make new loans. The company raises money in the capital markets by issuing notes and debentures and by issuing mortgage-backed securities. Fannie Mae suffered substantial losses in the early 1980s when interest rates suddenly rose, forcing it to pay more for capital than it was getting from the long-term fixed-rate mortgages it was holding in its portfolio. The company has been restructuring its business, and expects a profit this year.
Maxwell recently discussed the nation's mortgage and capital markets with editors and reporters from the Business and Real Estate sections.
Q: Fannie Mae has at times been described as the world's largest savings and loan. And plainly you still acquire loans for your own portfolio. But your role is also that of an intermediary between the capital markets and the home buyer. Is that the way the home mortgage finance system is going -- to the intermediary institution and tapping the capital markets as opposed to the depository institution making loans out of its deposits and other assets?
A: I think they'll fit together. I think depository institutions will continue to be important providers of mortgage money. People throw around these numbers and we're the same as everybody else -- our number for the next 10 years is $1.6 trillion is needed for housing in this country. And we believe that about 60 percent of that would be provided by thrifts. But a lot of their production will, I think, be sold into the secondary market in various ways. And some of it to Fannie Mae. But I do believe that our intermediary role is the central role that we have always been called upon to play. And I just think that the S&Ls, for a variety of reasons, will be availing themselves more of the secondary market than they have . . . .
Q: Do you think the current mortgage finance system is adequate to provide the $1.6 trillion or are there going to be capital supply problems?
A: I don't think so if people don't wreck it. There are a lot of people around who seem to feel that it requires constant tinkering, and I believe that, particularly right now when we have rather unsettled conditions in financial markets, that the system as whole -- it's not perfect -- but I think it has proved to be workable and I think it can provide the funds.
Q: Obviously a part of the unsettled conditions in the market are things that come to mind are farm credit, which is somewhat analogous to Fannie Mae as one of the largest direct or indirect liabilities of the federal government. What do you think should be the government's proper role in this so that we don't wreck the mortgage market?
A: Well, the farm credit situation is, I think, a reflection of a general binge that we've been on in this country in providing credit. Farm credit is one example; EPIC is certainly another. And I think that we will see others . . . .
I think it's really the morning after. And I would say that the stricter underwriting standards for loans that we've adopted are a reflection of my strong feelings in that respect. There are, however, very great distinctions between farm credit and Fannie Mae. For one thing, we had enormously serious problems in 1981 that were based on interest-rate mismatch. And we have worked very hard and made a tremendous amount of progress in working out of that situation with no federal help at all . . . .
Farm credit's problems are loan quality and that is a much harder situation to overcome, and, moreover, if the government does something about farm credit, I don't see how they can possibly ignore the problems of the farm banks, the small banks that have a lot of terrible loans. And so . . . the problem is even bigger than farm credit . . . .
Q: Let me shift gears a little bit here and ask: the people working in the industrial sector would claim that for a long time that housing has had a very preferential position as opposed to industry in terms of the cost of capital and that even here some economists and some industrial planners argue that now that ought to be tipping back a little bit to give a more favorable cost of capital to industry. What's your reaction? Do you buy the argument that our industry is handicapped in foreign competition because of the cost of capital?
A: I think our industry is handicapped in competing with foreign companies in a lot of different ways and cost of capital may be one of them now. And certainly, organization is another. . . . I don't think enough emphasis is put on the fact that Japan started from scratch after the Second World War and built everything new and modern, and a lot of our older industries, which are the ones that are particularly in trouble, at least some of the ones that are particularly in trouble, have really fallen behind. And I think technologically as well as organizationally. And I think in leadership.
So certainly . . . if you carry on from that base and say, well, if it's a cost-of-capital question, then housing is somehow responsible for the problems of the industrial sector of the economy -- I would absolutely not agree with that.
And I've heard that argument made, that housing crowds out other capital users. Actually, it is the government that crowds out other capital users. It is the budget deficit that is really does that because it is not used for productive goods and services.
Q: But would it be valuable to perhaps adjust the various tax incentives that now benefit housing to try to create additional incentives for the industrial sector?
A: Well, one can talk about the tax incentives for housing as to whether they are right or wrong. I would not state the question in the context of whether they should be eliminated to provide further incentives for some other sector. Because if -- leaving aside the tax reform proposal -- you take the defense budget and the accelerated depreciation, and all the other things that are now provided to the industrial sector, I think they add up to a lot.
The mortgage interest deduction is a very, very large subsidy to home ownership in this country . . . . That's a question not of use of capital so much as it is a question of the society's priorities. And America has always had a priority to support home ownership. And that's a very major way of supporting it. I think a proper way, but others could disagree with that legitimately.
Q: Would you like to see some change in the tax deductibility of interest on installment credit?
Q: It's too generous?
A: I think so. That was part of Treasury I. I thought that was a good idea.
Q: Do you in the new Congress, or this session, plan to seek any changes in your charter? Do you have any plans along these lines?
A: No. We went to the Congress back in 1982 with some ideas about broadening our charter very modestly in order to help us to get through the financial crisis that we faced. And we based that on the broadening of charters that were provided to the thrift industry that had similar problems. And very honestly, we didn't get anywhere with that. In the 1984 Secondary Market Enhancement Act, we got a few modest, but important, provisions but nothing that really broadened our powers, our corporate powers, and I don't think that we would at this point.
I would just hope that we would not see something in the other direction. For example, I'm told that the OMB has sent a letter to Sen. [Jake] Garn [R-Utah] in the last couple of days asking him to introduce a bill imposing user fees. We spent a lot of this year defeating that proposal in the budget conference. The Budget Committee of the Senate voted overwhelmingly against it. It's entirely inconsistent with our charter . . . .
Q: What would the consequences of the user fee be for Fannie Mae?
A: Well, it's hard to estimate with precision but we would of course have to pass on every single dollar that we have to pay to the Treasury to the home buyer that we could pass on. The total cumulative effect over five years as best I can remember -- and I thought that I was through with this so I tried to forget it all -- was about $250 million or something like that. It may have been higher but that's certainly not exaggerated.