Investment: Wall Street’s Favorite Girl

Fannie Mae leads two lives.

At its Washington headquarters, Fannie Mae—whose real name is the Federal National Mortgage Association —operates with the opulent dignity of a well-heeled bank. Its job is to provide mortgage money for Government-backed housing loans when funds are hard to get from private lenders. This year the association will finance about a quarter of the nation’s new housing.

On Wall Street, Fannie Mae is a volatile stock that has suddenly become enormously popular. Logically, a Government-sponsored enterprise ought to be about the last source of frenzied speculation. Yet in the three months since Fannie Mae common began trading on the New York Stock Exchange, more than four-fifths of its 8,600,000 shares have changed hands. Last week it was the most actively traded issue on the Big Board. Its price has gyrated sharply since the initial listing at $46.75 a share; it closed last week at $60.

Low Margin. Speculators have been intrigued largely because Fannie Mae’s quasi-governmental status exempts it from all the regulations of the Securities and Exchange Commission. Alone among the 1,325 common issues on the Big Board, Fannie Mae shares can be bought with only a 20% down payment, compared with the usual 65% margin for other stocks.

Why does Fannie Mae have this unique position? As a Government agency, created in 1938, it had little difficulty raising money for its mortgage loans on the private market; but all of these borrowed funds went on the Treasury’s books as red ink, swelling the federal deficit. So Fannie Mae became a private corporation in 1968, and last May control of its board of directors passed into the hands of its 7,300 private stockholders. Nevertheless, Fannie Mae remains by law a “corporate instrumentality of the U.S.,” and many crucial decisions concerning its borrowing, dividends and other matters are subject to approval by George Romney, Secretary of Housing and Urban Development. With $15.5 billion in assets, Fannie Mae ranks as the nation’s eighth largest company.

Its recent performance would hardly seem to recommend Fannie Mae as an investment. Net income for the six months ended in June fell to 24¢ a share, compared with $1.87 a year earlier. The corporation borrows by selling notes, debentures and bonds to big institutional investors, then uses the funds to buy mortgages from mortgage firms across the U.S. Its profits come from the difference between the interest that it pays to borrow and the income that it collects from mortgages and fees. Lately that difference has been precariously small. According to its latest figures, at the end of September the corporation was receiving an average 7% return on its $14.9 billion portfolio of residential mortgage loans, the nation’s largest, but paying an average 7.64% interest on $14.8 billion of debt. Only the fees paid by the mortgage men who sell loans to Fannie Mae kept its books in the black.

Buyers of Fannie Mae stock have been gambling that interest rates will continue to fall. Even a modest ½% to 1% drop in the rate that the corporation pays for its funds could cause profits to soar. Reason: Fannie Mae borrows short but lends long. By issuing three-year debentures last week, for example, the corporation borrowed $500 million at an interest rate of 5¾%, the lowest in more than two years. Meanwhile, Fannie Mae will be collecting income on a huge bundle of recently written mortgages—many of them paying 8½%— that run for 30 years. “Fannie Mae is developing an increasingly buxom profile,” says President Allan Oakley Hunter, who took charge last year after a career as an FBI agent, U.S. Congressman from California and general counsel to the Housing and Home Finance Agency. “As we roll over our debt while interest rates come down, we’re going to be in an increasingly stable and profitable position.”

That enthusiasm is reflected in the atmosphere of Fannie Mae’s offices, which now sport bright red and yellow pile carpeting, original oil paintings and plush furniture. Gordon Nelson, the association’s press agent, even wears a flashy tie pin engraved with a bull and a bear and the price of the company’s stock when it moved onto the Big Board.

High-level Help. Most mortgage men like to do business with Fannie Mae, but some argue that the association is overburdened with debt and competes unfairly against private lenders. For example, they contend that the corporation siphons funds from savings banks and savings and loan associations, which are prohibited by regulation from paying as much as Fannie Mae does to attract money from investors. Says Clarence Ostema, a Manhattan mortgage broker: “It is morally wrong for one Government agency to issue a stock when another Government agency, the Federal Reserve, can make it gyrate and allow speculators to make fortunes.” Naturally, the Federal Reserve has no such intention, but changes in monetary policy do indeed affect the profits of the mortgage giant.

Former Fannie Mae President Raymond Lapin, a prominent California Democrat who was ousted last year by President Nixon, concedes that the low margin requirement on the stock is “a weird arrangement.” Still, Lapin maintains that Fannie Mae has become so vital to home building that “if it got into real trouble the Government would have to rush in and bail it out.” Considering the increasing political importance of housing, Lapin is probably right. Compared with their chances for a quick killing, Fannie Mae stock speculators are exposed to minimal risk. At a time when Washington may be called on to impose stricter standards of behavior on the stock markets, it seems ironic that a loophole in the law has allowed a quasi-Governmental stock to become the most popular chip in the casino.