Nonprofits Complicit In Fannie Mae’s Failure

By Rick Cohen

Nonprofits in the metropolitan Washington are ginning up an organized pitch to the federal government to continue Fannie Mae’s corporate giving in the region. Well, they should. The Fannie Mae Foundation was the second largest grantmaker and largest corporate grantmaker in the metro area for many years.

Undoubtedly, a similar effort might be mounted nationally, as Fannie was the nation’s leading corporate grantmaker and one of the nation’s most generous overall to nonprofits in the field of housing and shelter. The foundation ranked #1 in the nation in 2003 and 2004 and only slipped a few places during 2005 and 2006 when the corporation’s Enron-like fiscal improprieties were revealed.

But nonprofit advocacy for continuing Fannie Mae’s philanthropic support exposes the insufficient nonprofit advocacy about Fannie’s corporate mismanagement and its support of some of the nation’s worst purveyors of subprime mortgages.

The potential losses in Fannie’s grantmaking nationally and in Washington, D.C., are stark: Between 1998 and 2004, the Fannie Mae Foundation (not counting what might have been awarded directly by the corporation outside of its foundation) handed out $119 million in grants of $10,000 or more for housing and shelter -- each of these years, Fannie ranking number one or two in the nation amidst company such as the Ford, McKnight, MacArthur, and Lilly. Among the nation’s largest 1,000 or so foundations, it accounted for just about one out of every 10 foundation dollars for nonprofits addressing housing and shelter. Through 2006, Fannie’s foundation arm put more than $138 million into housing groups and projects.

On top of that, Fannie was a major grantmaker in the realm of community improvement and development, distributing $106 million through 2006. Between 2002 and 2006, the foundation arm put $3.6 million into the Living Cities foundation consortium and millions more directly into an array of national and regional community development intermediaries. That entire sector will be reeling trying to plot a strategy of replacing Fannie’s centrality to their operations.

In metro Washington, D.C., Fannie supported groups that served the region (as opposed to national groups headquartered in the capitol) to the tune of roughly $15 million or so a year, a large amount in a region where there are really very few grantmakers, the largest being the Community Foundation for the National Capital Region, itself a beneficiary of very large Fannie infusions over the years, followed by the Eugene and Agnes Meyer Foundation. Without much indigenous philanthropic grantmaking in DC, nonprofits in housing, community development, education, and youth had come to count on the availability of Fannie’s charitable dollars.

Worth noting, however, is that by 2007, there was no Fannie Mae Foundation. In the wake of government and press exposes of Fannie playing fast and loose with accounting procedures, the foundation was shut down and charitable grantmaking was pulled inside the corporation.

Fannie pledged to keep its corporate grantmaking as transparent as its previous foundation grantmaking, where all foundation grants were listed on its 990PF plus searchable on its website; that didn’t happen. Fannie pledged to maintain its grantmaking in Washington, D.C. at a level comparable to its pre-2007 grantmaking, but many organizations saw their Fannie support plummet and the corporation’s SEC filings provide no indication of exactly what charitable giving went where.

But the Fannie Mae philanthropy problem cannot be reduced to a problem of ruing the loss of grant dollars. There were fundamental issues in the relationship of Fannie’s philanthropy with Fannie’s corporate practices and the response -- or non-response -- of most of the nonprofit sector that adds up to a sordid picture of self-interested grantmaking and, with few notable exceptions, relatively complicit grant recipients.

Despite highly dubious protests from nonprofit supplicants to the contrary, Fannie’s use of its philanthropy for political purposes was well known. Fannie regularly assessed the political connections of its grant recipients, actually carefully inventorying grant recipients’ “affinity contacts” and “franchise value” with Capitol Hill legislators. Groups that strayed from the message or even took the liberty of criticizing Fannie-the-corporation discovered rough sledding at Fannie-the-foundation.

The success of the strategy played out on critical issues of importance to the corporation: grantees lined up to support Fannie’s aggressive lobbying to be exempt from oversight from the Securities and Exchange Commission (eventually, SEC gave in to provide voluntary information to the SEC so long as it wasn’t mandated by law). Grantees were quiet when Fannie failed to meet its affordable housing goals in 2007. The nonprofit sector was invisible when Fannie did its Enron turn having to admit to a $9 billion overstatement of profits, resulting in the dismissal of key executives and a $400 million federal government fine.

And metro Washington, D.C., nonprofits lined up to deep six federal legislation that would have removed the for-profit Fannie’s local nonprofit-like tax exemption. Fannie would have had to kick several times as much money into DC coffers than it awarded nonprofits that served the metro DC area, but the nonprofit community put Fannie’s continued tax exemption on a higher level than having it pay its fair share of corporate taxes. This wasn’t a tax exemption for a struggling nonprofit, but for the nation’s 8th largest corporation, with $882.5 billion in assets, according to the Forbes 2000.

Fannie officials would routinely assert that there was a “firewall” between the foundation and the corporation, so that no pressure would come from the corporation to channel philanthropic grants to benefit the corporation. In fact, the argument for shutting down the foundation was to allow the corporation to link its grantmaking more closely to the corporation’s business interests.

The gossamer-thin firewall hardly seemed a problem to that point, but by moving philanthropic giving into corporation did achieve the lack of public disclosure of philanthropy that characterizes direct corporate giving. Even the salaries of philanthropic executives disappeared behind the corporate shroud of secrecy. For example, Fannie Mae Foundation CEO Stacey Stewart earned $625,000 in 2006 and $650,000 in 2005, but once brought into the corporation as a senior vice president to manage the corporate giving program, her salary and benefits package in 2007 shifted to “undisclosed” according to Business Week.

Remember that the overstatement of profits was part of a go-go corporate culture at the corporation under CEO Franklin Raines, where hitting profit targets triggered massive bonuses for executives and board members. When Raines and his colleagues were forced out, Raines was hit with personal penalties and fines for his role in overseeing Fannie’s cooking the books. But the result was a soft landing: his fines were paid by Fannie’s insurance, he donated some Fannie stock proceeds to charity, and he gave up some stock options that will probably turn out to be worthless. Compared to the outrage of the nonprofit sector over Enron and others caught with fraudulent bookkeeping, nonprofits were exceptionally reticent about questioning Fannie’s practices and corporate culture.

Most remarkable has been the quiescence of nonprofit advocates over Fannie’s role in the subprime mortgage crisis. In early 2007, Fannie’s CEO, Daniel Mudd, declared that Fannie had minimal subprime exposure. That certainly hasn’t proven to be true. In fact, just based on its dealings with Countrywide Financial, the reverse is true. In 2007, when Countrywide was in its slide into virtual bankruptcy, Countrywide accounted for 29 percent of Fannie’s business. Routinely, Countrywide was between 10 percent and 30 percent of Fannie’s business this century and even higher than that before.

For all the nonprofits that are struggling to help homeowners stave off foreclosure and neighborhoods avoid precipitous declines, they can credit Fannie for having contributed to the problem. Countrywide’s Angelo Mozilo frequently credited Fannie in public and on Capitol Hill for providing the liquidity and market organization it did, in obviously by buying up scandalously issued adjustable rate mortgages and exotic loan products that are depriving millions of families of their homes.

According to a spokesperson for the National Association of Affordable Housing Lenders on Fannie’s (and Freddie’s) freefall, “They have not really done affordable housing…If they had done legitimate affordable housing, they wouldn’t be in this mess.” Nonprofits would be producing quality housing for more potential homeowners and renters instead of struggling to save households from foreclosure, eviction, and homelessness.

The public didn’t really know Fannie’s role in the housing turmoil, because all most people got from the corporation, the foundation, and the bulk of grantees was testimonials. Perhaps there might have been a little more criticism hadn’t the foundation been permitted to pay for the advertising budget of the corporation as a philanthropic expense, usually at levels exceeding the foundation’s grantmaking, reaching close to $50 million in philanthropic ad expenditures. That practice ended only in 2005 when Capitol Hill cottoned to the use of foundation-paid advertising to defend Fannie’s SEC registration exemption.

Many nonprofits put Fannie’s philanthropic giving to good use, producing affordable housing and neighborhood improvements across the country. But in the corporation’s lens, the philanthropic giving, reaching most important Congressional Districts, was part of a package linked to a network of building what one observer described as a “small army” of supportive nonprofit grant recipients, plus the local influence-mongering of 55 local Fannie Mae “partnership offices” (renamed “community business centers” the federal government and Congress discovered more lobbying than service in these offices) and the expenditure of $55 million between 2000 and 2007 for one of Capitol Hill’s most aggressive, take-no-prisoners federal lobbying programs.

Good luck to the metro DC nonprofits trying to make a case to the new federal overseers of Fannie’s “conservatorship” (a nice term for something like being in receivership) for continued charitable giving. The area needs foundation investment. This is nonprofit advocacy of a sort, but the opportunity for real advocacy that the nonprofit sector should have done about Fannie Mae-the-corporation and Fannie Mae-the-philanthropy has passed by the boards, with the result of displaced homeowners, declining neighborhoods, and subprime foreclosure-induced economic turmoil. No amount of Fannie Mae’s grantmaking will undo that damage.

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Rick Cohen is the former executive director of the National Committee For Responsive Philanthropy in Washington, D.C. His email address is cohenreport@npqmag.org and the Web site for the Cohen Report e-newsletter is http://www.nonprofitquarterly.org/cohenreport/