Hybrid Organizations and the Alignment of Interests: The Case of Fannie Mae and Freddie Mac

Although their names suggest Southern folksiness, Fannie Mae and Freddie Mac are recognized in Washington for their political clout, not their down-home cooking. Fannie Mae and Freddie Mac, known formally as the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation, respectively, are government-sponsored enterprises (GSEs)--stockholder-owned, profit-seeking corporations created by Congress to help address America's housing needs. GSEs are one type of hybrid organization that combines characteristics of public- and private-sector entities. Although they are increasingly popular at the local, state, and national levels of government, hybrids receive relatively little attention. This article considers the political influence of GSEs through an examination of congressional crafting of legislation in 1992 to reshape the regulatory oversight of Fannie Mae and Freddie Mac. Specifically, this article has two objectives: * Provide better understanding of GSEs. "While called `private,'" observes Harold Seidman, who coined the term government-sponsored enterprise, "these enterprises really function in a terra incognita, somewhere between the public and private sectors" (1988,23). While some have suggested frameworks for considering the gamut of hybrid organizations (see Perry and Rainey 1988), this article takes the opposite tack: It is field reconnaissance, an effort to understand the dynamics surrounding a particular type of hybrid. * Specify the interaction of organizational structure and political influence. David Truman observes that "Although the effect of structural arrangements is not always what its designers intended, these formalities are rarely neutral" (1993,322). It should not be surprising that the characteristics distinguishing government-sponsored enterprises from private corporations and government agencies should distinguish the nature of their political influence as well. Federal regulators recently unveiled proposed regulations intended to ensure the financial safety and soundness of the two GSEs and to set levels of performance for low-income borrowers. Thus it is a timely moment to revisit legislation calling for the regulatory overhaul. The legislative history presented in this article was constructed from official records, trade magazines and newspapers, and extensive background interviews with participants from all sides including multiple executive agencies, Fannie Mae, Freddie Mac, interest groups, congressional staff, and other interested parties.(1) What Are Government-Sponsored Enterprises? Government-sponsored enterprises (GSEs) are hybrids--part public, part private--that affect the lives of most Americans. Anyone who has borrowed money to purchase a home, farm, or pay for college, or invested in a mutual fund has likely been touched by government-sponsored enterprises.(2) Fannie Mae and Freddie Mac are public in several respects. Created by Congress to serve public purposes, they are exempt from state and local taxes, exempt from registration requirements of the Securities and Exchange Commission, and have a $2.25 billion line of credit with the United States Treasury.(3) They are not, however, subject to regulations that govern the activities of federal agencies. Their staffs are not considered government employees. On the private side, Fannie Mae and Freddie Mac are profitable businesses owned by private shareholders. Their combined net income in 1998 was over $5 billion (OFHEO 1997). In terms of assets, Fannie Mae and Freddie Mac rank third and sixth, respectively, among American corporations (Fortune 1999). Fannie Mae and Freddie Mac stock, traded on the New York Stock Exchange, consistently outperforms the S&P 500 average. Their executives earn multimillion-dollar salaries comparable to their Fortune 500 peers. Although there is no direct cost to the federal government, GSEs do present financial risk. …