Mortgages: 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."