Shrinking the Federal Realm

"I did not come to Washington to retain the status quo in the mortgage market," said Multimillionaire San Francisco Mortgage Banker Raymond H. Lapin, 49, when he took over the $28,000-a-year presidency of the Federal National Mortgage Association nine months ago. What was needed, he said was nothing less than "changes in structure, policy and objectives" of the nation's largest mortgage facility. Skeptics smiled wisely, knowing that such grand plans are often as not pulverized by the ponderous machinery of Government. Yet last week, when Lapin ordered a radical change in the way FNMA conducts its business, there was not a murmur of dissent from the frequently fractious housing industry.

Leveling the Peaks. A 30-year-old New Deal creation, the association today is a partly private, partly Government-owned corporation with $2.4 billion to invest this year in FHA and VA mortgages, the only kind in which it deals. Better known by its nickname, Fannie Mae, the association's chief purpose is to help level off the costly peaks and valleys in U.S. housebuilding volume. It does so by buying mortgages in large quantity when home loans are scarce, selling part of its $9.6 billion portfolio when funds are plentiful. Fannie Mae deals only with such approved lenders as banks, mortgage and insurance companies, and savings and loan associations. By buying their mortgage loans, it replenishes their investment capital. The transactions are generally handled by mail through Fannie Mae's five field offices.

Because FHA and VA loans carry a 6% interest ceiling (which the Johnson Administration has asked a reluctant Congress to repeal), almost all private lending institutions are willing to make them only at a big discount--that is to pay out about $9,200 for a mortgage with a face amount of $10,000. This has the effect of raising the return closer to 7%--a cost which homebuilders pass along to buyers disguised as a higher price for their homes. In a time of rising interest rates, when lending institutions demand increasing discounts, Fannie Mae faces a dilemma.

Its reluctance to raise its own discounts and add more upward pressure to housing costs results in a rush to dump loans on Fannie Mae. The association's resources get swamped, and it is forced to curtail purchases just when they are needed most to sustain housebuilding. When Fannie Mae moves to charge an increased discount, private lenders demand still larger ones. In its effort to conserve dwindling funds during the 1966 credit squeeze, Fannie Mae refused to buy loans larger than $15,000--a decision which Lapin says led to "pernicious inequities and market distortions" because "high-cost areas were effectively cut off from FNMA."

Auction in Reverse. Now, Lapin expects to free Fannie Mae from such problems. Instead of buying (and selling) loans at a preset--and infrequently changed--discount, it will hold a weekly auction in reverse. Bidders will not be buying, but competing for the right to sell Fannie Mae loans at some future time. Thus the private market will set the price, or discount, while FNMA controls the volume of its business probably $40 to $50 million a week.' For loans on new or used houses, the association will accept bids to deliver mortgages within either three or six months. For houses yet to be started, it will accept mortgages to be delivered within a year--a condition that will enable builders to erect subdivisions without gambling on the future cost of financing. "The more flexible we are, the more money there will be for mortgage loans," says Lapin. "That should mean some reduction in costs for buyers, as well as a substantial increase in housing starts."

The "free-market auction," as Innovator Lapin calls it, will begin May 6 as only the first phase of the shake-up he has devised for Fannie Mae. Last week the Senate Banking Committee gave tentative approval to an Administration-backed bill that would convert the agency's main operation into a completely private company. If the bill passes, Fannie Mae will buy back the $142 million of its preferred stock now held by the U.S. Treasury. "We don't need the Treasury's money," says Lapin. Ultimately the corporation would be controlled by its 9,598 private stockholders* subject to a few important policy guidelines set by HUD Secretary Robert Weaver, the present chairman of FNMA's board of directors. Most important of all, the change would remove a cloud that looms over the agency's ability to continue operating. Under the Government's new budgetary bookkeeping, all of Fannie Mae's mortgage purchases add to the already large federal deficit.

* Since 1954, FNMA has required lenders who sell it loans to buy common stock as a condition of each transaction. Under current rules, lenders must buy stock (at book value of $130 per share) equal to 1% of the loans they sell. Fannie Mae's is the only stock of a Government corporation traded on the private market.

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