Fannie Mae, which owns one mortgage in ten nationwide, has reported earnings for 2000 of $4.448 billion, up significantly from 1999 when the huge company earned $3.912 billion. The latest report marks the 14th consecutive year of record annual earnings -- and the heart of a growing controversy.

Fannie Mae is a secondary lender, a term which means it does not actually make loans directly to consumers. Instead, it buys FHA, VA, and conventional mortgages from local, regional, and national lenders with offices in thousands of communities. Fannie Mae gets the money to buy loans from the sale of mortgage-backed securities purchased by investors.

The secondary market is important because it buys loans from local lenders. The cash lenders receive from the sale of those loans can then be used to fund a new series of mortgages. In other words, if a lender sells mortgages worth $10 million to Fannie Mae, the local lender then has another $10 million for homebuyers and those refinancing.

The attraction of this system is that loan rates nationwide are largely equal and also that money can quickly move from one area of the country to another in response to local demand. The result is that no town or region suffers from either a shortage or a surplus of mortgage funds because such money is equally available everywhere.

While a big increase in profits is normally seen as good news, with Fannie Mae such prosperity is a double-edged sword.

Fannie Mae -- like Freddie Mac (which owns about 7 percent of all mortgages nationally) -- is a GSE or "government sponsored enterprise." Being a GSE means that Fannie Mae and Freddie Mac pay federal income taxes -- but not state income taxes of registration fees with the Securities and Exchange Commission. Moreover, the two firms have a $2.25 billion line of credit with the U.S. Treasury, a relationship which allows then to attract capital at low rates.

Members of Congress, consumer leaders, FMWatch, and others have argued that the special privileges awarded to GSEs should end or be reduced. Fannie Mae and Freddie Mac contend that the special advantages they enjoy result in loan costs for borrowers and thus are in the public interest.

Freddie Mac, for one, says that the GSEs do obtain significant benefits from their special tax benefits and other perks. However, Freddie Mac also argues that the public benefit is far greater.

"We estimate that Freddie Mac and Fannie Mae generate interest-cost savings for American consumers ranging from at least $8.4 billion to $23.5 billion per year, says Freddie Mac. "In contrast, we estimate that the value Freddie Mac and Fannie Mae indirectly receive from federal sponsorship in the form of their funding advantage ranges from $2.3 billion to $7.0 billion annually. Thus, even using the lowest estimate of consumer benefits and the highest estimate of the funding advantage in our range of estimates, the value of consumer interest-cost savings resulting from Freddie Mac and Fannie's activities significantly exceeds the value of their funding advantage."

A major concern among GSE opponents is that the giant companies will use their preferential economics to enter new fields.

The GSEs, according to Howard Glaser, senior staff vice president and general counsel of the Mortgage Bankers Association, "attach conditions on the deployment of their technologies, build brand identification with consumers, and invest in primary market service providers, their activities have direct impact on primary market participants. Although the immediate casualties of Enterprise incursions into the primary market might be existing mortgage providers, we believe consumers will be the ultimate losers. Less competition means higher borrowing costs and fewer financing options over the long term."

Not only are lenders interested in the GSEs and what they do, but so are others in real estate. In 2000, Fannie Mae reports that it "acquired 14,351 conventional single-family properties through foreclosure in 2000, compared with 16,806 properties in 1999." Those homes, of course, need to be sold, financed, appraised, surveyed, inspected, and titled -- all matters of great interest to the real estate community.

Published: January 12, 2001

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Peter G. Miller, also known as OurBroker®, is the author of six real estate books -- including The Common-Sense Mortgage -- and is the original creator and host of America Online's Real Estate Center. Peter's weekly columns appear in more than 100 newspapers nationwide, he is also published in a variety of other media outlets and he is a frequent speaker at national events and conventions. Peter welcomes your questions, comments, and news releases via e-mail at .