Franklin D. Raines has a lot to smile about. In mid-January, the Federal Mortgage Loan Association, better known as Fannie Mae, accomplished something that’s rather uncommon these days—increased profits. Operating net income for fiscal 2002 rose 19.1% to $6.4 billion, or $6.31 on $10.6 billion in net interest income. And while Wall Street remains jittery after a slew of corporate scandals, economic uncertainty, and whispers of housing bubbles, Fannie Mae’s 54-year-old chief executive is at the helm of a financial products and services giant that posted its 16th consecutive year of double-digit earnings growth.
Raines is steadfast in his approach despite criticism contending that though the record-low interest rate environment has fueled strong earnings at Fannie Mae, interest volatility is causing higher than usual interest rate risk and murmurings on Wall Street about a possible housing bubble. “We don’t think that there is a housing bubble in the country,” says Raines, who points out that housing prices are higher because interest rates are lower. “And people’s incomes are higher so they can afford more housing and, obviously, the owners of the house [will] try to raise the price when they’re selling it.”
Among Fannie Mae’s biggest critics is The Wall Street Journal, which published several editorials about the risks the company takes. According to Raines, “The Wall Street Journal finds problems where no other paper seems to find problems.” And he has concluded that the newspaper doesn’t “ideologically” think Fannie Mae should exist. “They don’t believe in intervening in the market to help housing and homeownership. And so, I think this is an effort to make the case that Fannie Mae shouldn’t exist,” Raines says of the Journal’s editorials.
Gary Gordon, managing director and stock analyst at UBS Warburg, has covered Fannie Mae since 1987 and believes that the risks the company takes are reasonable ones, claiming that some of Raines’ critics don’t fully understand the housing market. “They live in New York or some high-cost area and they worry about [the housing market] but they don’t know that in Iowa, Texas, and Florida things are very different.” Gordon says that although there are some real concerns about parts of the housing market and some locations in the country, he doesn’t see a massive decrease in home prices taking place across the country.
There’s no doubt Fannie Mae has been riding the wave generated by the red-hot housing sector. The Mortgage Bankers Association of America and Fannie Mae report that new home sales hit 976,000 units in 2002, a 7.4% increase, with 924,000 sales projected in 2003. Housing starts (an economic indicator that refers to the number of residential building permits issued for construction of new homes) experienced a 3.1% rise to total 1.7 million units in 2002, and the same level of activity is expected this year.
Under Raines’ leadership, Fannie Mae initiated the American Dream Commitment two years ago to increase homeownership rates and serve 18 million American families. The corporation has pledged to invest $2 trillion over a 10-year period. One