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Fannie, Freddie Spent Millions on Lobbying

For years, mortgage giants Fannie Mae and Freddie Mac tenaciously worked to nurture, and then protect, their financial empires by invoking the political sacred cow of homeownership and fielding an army of lobbyists, power brokers and political contributors.

New attention is being focused on the bruised mortgage companies as the Bush administration presses its rescue plan to Congress.

Some lawmakers have challenged the plan's open-ended nature and expressed fears of a potential big taxpayer bailout in an election year.

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Over the past decade, both Fannie and Freddie made the list of Washington's top 20 lobbying spenders.

They spent a combined $170 million to cultivate allies during that period, a bit less than the American Medical Association and a bit more than General Electric (GE is the parent company of CNBC).

At the same time, their executives have consistently led the mortgage-banking sector in campaign giving to members of Congress, contributing a combined $16.2 million since 1997.

People who have lobbied on their behalf have played or are playing roles in the presidential campaigns of both Republican John McCain and Democrat Barack Obama.

Defenders, including President Bush and Treasury Secretary Henry Paulson, say the nation's two major mortgage companies -- which own or guarantee roughly half of the nation's $12 trillion in outstanding mortgage debt -- are more vital than ever to the smooth functioning of the nation's jittery financial markets.

The two companies were set up by federal law as "government-sponsored enterprises" that operate as private companies with profits and stockholders.

Critics say they have used their clout and unusual status to create a sort of regulation-free zone around their businesses.

When times are good, shareholders and executives of the companies are richly rewarded.

When times are bad, as now, taxpayers could be left holding the bag.

"Congress created this problem by creating special rules at Fannie Mae and Freddie Mac and ignored the problem for years," said Sen. Jim DeMint, R-S.C., a sharp critic of what he sees as a looming federal bailout.

Fannie Mae -- the Federal National Mortgage Association -- was established in the 1930s to encourage homeownership by buying mortgages from banks.

That freed cash for the banks so they could make new loans.

Fannie and Freddie Mac (Federal Home Loan Mortgage Corp.), created later but with basically the same mission, hold some of the mortgages in their own portfolio and package the rest as bonds and other securities, which they sell.

Neither one makes loans on its own, and they were not directly involved in the subprime mortgage fiasco.

But the housing downturn is so steep that they have been seeing increasing delinquencies on their conventional mortgages and have been exposed to investor flight from financial assets.

Furthermore, because of their special status, they can keep smaller capital reserves on hand than other financial institutions.

They need to raise cash to stay afloat.

Long Time Lobbiers

Fannie and Freddie have long been distinguished by their outsized influence.

They spend heavily on lobbying and hire liberally from Capitol Hill's revolving door and their executives give top dollar to political campaigns.

They've also funneled contributions into select charities and think tanks.

"They have always understood that the political risk was huge for them, and they put millions of dollars into using contributions, jobs and consulting contracts to stay in the good graces of people in power," says Wright Andrews, a veteran banking lobbyist.

"They had both parties -- and particularly the Democrats -- under incredible control."

To help keep themselves free from unwanted regulatory and congressional prying, the two mortgage giants have surrounded themselves with scores of well-connected allies.

Fannie Mae's 51-member lobbying stable, according to its most recent disclosure, includes former Reps. Tom Downey, D-N.Y., and Ray McGrath, R-N.Y.; Steve Elmendorf, a Democratic political strategist and former congressional aide; and Donald Fierce, a longtime GOP operative.

Freddie Mac's list of 91 lobbyists includes former Reps. Vin Weber, R-Minn., and Susan Molinari, R-N.Y.

At times, the push for influence has gone over the ethical line.

In 2006 Freddie Mac paid a $3.8 million civil penalty to the Federal Election Commission to settle charges that it had used corporate resources to stage 85 fundraising dinners that raised $1.7 million for candidates for federal office.

In internal documents, Freddie Mac described the events as an exercise in "political risk management."

The fine still stands as the largest in the FEC's 33-year history.

Political Connections

This past April, former Fannie Mae chief Franklin Raines and two top executives agreed to a $31.4 million settlement with the government over their roles in a 2004 accounting scandal.

Raines, the company's former chief financial officer, Timothy Howard, and former controller Leanne Spencer were accused in a civil lawsuit of manipulating earnings over a six-year period at Fannie.

Raines was appointed by Clinton, after serving as White House budget director under Clinton.

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Raines' predecessor, former Fannie Mae chief James Johnson, is a prominent Democrat who was an adviser to 2004 Democratic presidential nominee John Kerry and was selected by Obama to help vet his vice presidential prospects.

But controversy over favorable loan deals he obtained with Countrywide Financial, a bank seriously damaged by the mortgage meltdown decline, prompted him to abruptly resign that post in June.

McCain's campaign manager, Rick Davis, also has ties to Fannie Mae.

He was president of the Homeownership Alliance, a Fannie Mae and Freddie Mac-led advocacy group.

And Arthur B. Culvahouse Jr., a one-time White House counsel to President Reagan, is providing behind-the-scenes advice to McCain in the Republican's search for a running mate.

Senate records show Culvahouse was registered to lobby on behalf of Fannie Mae and Lockheed Martin in a couple of instances several years ago, although his allies say his involvement was not extensive.

Congress and presidents have often looked favorably on legislation to encourage more homeownership, from the hallowed income tax deduction for mortgage expenses to setting up the Federal Housing Administration and Fannie and Freddie to help make affordable mortgages more available.

President Bush has made the "ownership society" a main theme of his presidency.

Officials and lobbyists for Fannie and Freddie played on this political soft spot in making their case before Congress, establishing a record of fiercely protecting their domain and resisting efforts to bring tougher regulation.

"They have extraordinary powers and exercise them in a muscular way," said former Rep. Jim Leach, R-Iowa, who fought years ago to try to rein in the two companies' influence and growth.

"That muscularity could prove to be counterproductive" if the lower cash-reserve requirements the two mortgage companies were able to obtain for themselves leads now to inadequate capital, said Leach.

The former House Banking Committee chairman said the government should throw them a lifeline -- but with a conditional line of credit requiring full repayment plus a premium, as it did in loans that helped rescue Chrysler and Mexico.

Paulson's Plan

Paulson on Sunday announced a plan to create a line of credit for Fannie and Freddie with an unspecified limit for 18 months and to give the Treasury authority to buy stock in the two companies.

The two companies defend their past actions and their financial integrity and say the current housing crisis will pass.

"Clearly there's some tough slogging ahead. We've got some challenges in the home ownership market to work through," said Fannie's CEO, Daniel Mudd.

"But if you think about the overall structure of the market, we're right there at the center," Mudd said in an interview with CNBC.

"If you want to securitize a loan, that's what we do."

Mike House, a lawyer-lobbyist who is executive director of FM Policy Focus, a financial watchdog coalition that monitors the two government-chartered mortgage companies, said the preferential treatment that Fannie and Freddie have enjoyed "came about because it was a strategy on their part, executed over a number of years."

But he added, "Nothing in Washington is unassailable, no matter what their mission is -- so long as they're properly regulated."

He favors compromise housing legislation now being crafted between House and Senate versions, with administration help.

The bill would modernize the Federal Housing Administration and create a new regulator and tighter controls for Fannie Mae and Freddie Mac.

"I think the original purpose (of Fannie and Freddie) is one that is needed in the marketplace," said House.

"And I think that the legislation that is moving through Congress will provide strong regulatory oversight and will make sure everything is done in a balanced way."

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