This article is excerpted from a memorandum to Morgan's clients.

The core of Fannie Mae's current political strategy - even more so than direct work with congressmen and their staffs - centers on building coalitions of support.

Up until several years ago, the company's key political trump card was that three main constituencies - mortgage bankers, realtors, and homebuilders - fiercely opposed any curtailment of Fannie Mae's and Freddie Mac's role in increasing the flow of funds into housing.

All three groups were well diversified geographically, resulting in the ability to communicate with every member of Congress. Each group was also influential in other respects.

For the mortgage bankers, the role of the two agencies was and is a matter of life and death; they provide the channel through which mortgage bankers distribute the vast majority of their production into the secondary market.

Money Still Counts

Without them the competitive parity of mortgage bankers with other loan originators would largely disappear.

The mathematics of financial self-interest is still a factor in Fannie Mae's favor - possibly more so as a result of the growing political and economic clout of mortgage bankers, who now account for 60% of mortgage originations, versus just 30% several years ago.

But over the last several years, Fannie Mae has built an astonishing array of allies throughout the political spectrum. First and foremost, the company has become the fulcrum of efforts to expand affordable housing initiatives and to curtail discrimination in mortgage lending.

The company's much publicized "trillion dollar" initiative - by which it will lend $1 trillion to families in certain groups over the remainder of the decade - is difficult to interpret, since most of that lending would have occurred naturally as part of Fannie Mae's mainstream lending (plus inflation).

But the publicity surrounding the trillion-dollar figure is politically useful insofar as it highlights the company's central role in providing housing finance for a vast swath of middle-class and lower-middle-class families.

Relatively Low Risk

More specifically, the company has in place or is developing programs to provide mortgages to the elderly, the disabled, AIDS sufferers, farmers, native Americans, Hispanics, blacks, immigrants, co-op owners, earthquake and hurricane victims, residents of specific cities, and low-income and moderate-income renters, among others.

Each program involves rigorous monitoring and operating controls, enough so, in our view, that the risks of disproportionate credit losses are minimal.

But each new program entails a new set of allies. Every program involves a new business network of partners and beneficiaries, and each business network becomes a potential source of political support.

A good example of Fannie Mae's effort to build alliances is a proposed program to lend homeowners the funds needed for energy-efficiency improvements. Essentially, public utiliies will market the program, help arrange the retrofit, and share a portion of the credit risk.

Local banks will perform the origination and servicing functions, with Fannie Mae providing the underwriting and the funding.

As a result of this program, Fannie Mae is likely to build support with utilities. The Sierra Club is involved with several phases of the program, and a panoply of energy conservation and environmental groups have warmly endorsed it.

Conceivably, this program could involve several billion dollars of new lending, with operating margins considerably higher than Fannie Mae's traditional business. But what matters more is the perception that Fannie Mae is an integral part of efforts to conserve energy, reduce utility bills, and preserve the environment.

Fannie Mae has created a cadre of more than 100 employees whodevise and implement targeted lending programs. Each program provides Fannie Mae with an additional opportunity for "doing well by doing good."

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