Carter, Clinton-Era Budget Official Ran Institution at Center of Financial Crisis
A July 16, 2008 article in The Washington Post reported that the post-scandal Raines "has been quietly constructing a new life for himself" and had recently "taken calls from Barack Obama's presidential campaign seeking his advice on mortgage and housing policy matters."
However, when this article became the subject of a McCain campaign video, the Obama campaign released a statement by Raines, who said: “I am not an advisor to Barack Obama, nor have I provided his campaign with advice on housing or economic matters.”
Ultimately, Raines served as CEO of the Federal National Mortgage Association, the government-sponsored entity at the center of the financial crisis.
Fannie Mae was started as a government organization during President Franklin Roosevelt’s “New Deal." Under President Lyndon Johnson, it was converted into a “government sponsored enterprise” owned by shareholders. It purchases mortgages from banks to make it easier for them to make additional mortgages.
As a government-sponsored enterprise, Fannie Mae had a special credit arrangement with the government and did not pay income taxes.
Raines was ousted as CEO of Fannie Mae in 2004 in the midst of an accounting scandal. He made tens of millions of dollars during his tenure leading the institution.
On Sunday, September 7, 2008, the federal government took over Fannie Mae as part of an effort to prevent a national financial crisis.
Raines arrived in Washington more than three decades ago with an impressive Ivy League background. When still a student at Harvard, according to a 1996 report in Washingtonian magazine, he interned in the Nixon White House—for then-presidential advisor Daniel Patrick Moynihan, who later became a Democratic senator from New York.
After graduating from Harvard, Raines went to Oxford on a Rhodes scholarship, then returned to Harvard to earn a law degree.
Raines got his full-time start in Washington in 1977, working for President Jimmy Carter as assistant director of the White House Office of Domestic Policy. From that position, he moved on to become associate director of Carter’s Office of Management and Budget.
In 1979, he left the Carter White House to become a vice president of Lazard Freres & Co., a New York investment bank. He eventually became a partner there.
In 1991, Raines left Wall Street to become vice chairman of Fannie Mae, whose CEO was then James Johnson—who later briefly headed Barack Obama’s vice presidential search committee. In that stint at Fannie Mae, Raines served until 1996, when President Clinton named him director of the White House Office of Management and Budget.
When he went to work in the Clinton White House, Raines earned praise from both Republicans and Democrats. In a 1997 article in Time Magazine, Rep. Dick Armey (R-Texas) called him a “serious guy who understands what needs to be done and is going to do his level best to do it.”
After serving as OMB Director, Raines returned to Fannie Mae to become its chairman in January 1999. In that position, he pursued President Clinton’s housing policies, including expanding sub-prime lending and reducing long-established financial barriers to mortgage lending for low-income borrowers.
Raines began almost immediately to make it easier for low-income borrowers to get home loans, even if they demonstrated poor credit or paltry assets.
Within days of taking over Fannie Mae in 1999, Raines told the National Convention of Homebuilders in Dallas that Fannie Mae was reducing the mortgage-insurance requirement for would-be homeowners who had not saved 20 percent for a down payment on the home they wanted to buy.
Raines’ vision was to allow people to buy “more home” for less down payment and with less insurance.
“We can cut costs to consumers, qualify more home buyers, and give them more home for their mortgage payment dollar by reducing their mortgage insurance costs,” he told the homebuilders convention. “Eventually, we hope all low down payment borrowers will benefit from new approaches to mortgage insurance."
"Five years ago, we gave millions of Americans the chance to buy a home by lowering down payments, but requiring more mortgage insurance," Raines said. "Now we can offer home buyers the best of both worlds--lower down payments and lower mortgage insurance costs."
"While U.S. homeownership rates have reached record levels today, we can--and we should--extend this dream to more families by reducing the cost of financing a home," Raines said. "The mortgage finance system needs to bend to consumers' needs, not vice versa. Today's announcement offering customers new options that meet their needs while cutting costs is an important first step in the process."
In September of that year, Raines announced that Fannie Mae was moving to expand mortgage opportunities for people with “impaired credit.” At the time, Raines said that improved “risk-assessment technology” allowed Fannie Mae to get more mortgages into the hands of people with blemished credit histories.
"Fannie Mae has expanded homeownership for millions of families in the 1990s by reducing down payment requirements. Yet there remain too many borrowers whose credit is just a notch below what our underwriting has required who have been relegated to paying significantly higher mortgage rates in the so-called subprime market," Raines said.
"Through dramatic improvements in our risk-assessment technology, which enables us to more precisely identify a borrower's risk of defaulting on his or her home, we can say 'yes' to more borrowers and extend our service to them at lower costs," said Raines. "Some borrowers prefer to take their time to repair their credit rather than pay a higher interest rate. With today's announcement, we are offering a lower-cost option to those borrowers who would prefer not to wait, and a reward in the form of a lower mortgage rate as they further demonstrate their creditworthiness through timely payment of their mortgage."
When President Bush came into office vowing to increase home ownership by 5.5 million among minorities, Raines’ mortgage policies seemed in tune with the Republican administration’s goals. In June 2002, Raines told The New York Times that he had reoriented Fannie Mae’s policies to “deal with people who have less than perfect credit.”
Lowering down-payment requirements, he told the Times, would “make it more easily possible” for low-income borrowers to buy houses.
Raines’ policies did not come without scrutiny and calls for reform, however. By 2003, then-Treasury Secretary John Snow was urging Congress to grant his office veto power over Fannie Mae’s lending decisions.
While conceding that there should be some government oversight of the government-sponsored enterprise he ran, Raines warned the Senate Banking Committee in October 2003 that the government should not micromanage its activities.
“Congress should not open the door for the regulator to prescribe, outside the necessities of safety and soundness oversight, how the enterprises conduct their businesses--whether it be the management of credit and counterparty risk, management of interest rate exposure, issuance of subordinated debt, or adequacy of liquidity and reserves, to name just some of the issues the enterprises must manage,” Raines testified.
A veto power was part of the broad package of reforms sought by President Bush. It would have created a new regulatory agency for Fannie Mae and Freddie Mac under the Treasury Department.
Rep. Richard Baker (R-La.), however, concluded that the “regulator has not only been outmanned, it has been outlobbied,” by Fannie Mae and Freddie Mac.
Yet even as Raines resisted regulation, evidence mounted that Fannie Mae had gotten in over its head.
In May 2004, Fannie Mae announced that its shareholders’ equity had diminished by $1.6 billion in the first quarter of that year. In the second quarter of 2004, according to the New York Times, Fannie Mae would also need to write down the value of its “trailer home bonds” by $250 million.
In September 2004, the Office of Federal Housing Enterprise Oversight which oversees Fannie Mae, reported serious accounting problems at the organization.
“Regulators have found serious accounting problems at mortgage giant Fannie Mae, prompting an inquiry by the Securities and Exchange Commission and calling into question its financial soundness,” the Associated Press reported on September 22, 2004. "The Office of Federal Housing Enterprise Oversight released a report that describes what it sees as a pervasive pattern of earnings manipulation, lax internal controls and a corporate culture ‘that emphasized stable earnings at the expense of accurate financial disclosures.’”
In December 2004, Raines was forced out as CEO. "By my early retirement, I have held myself accountable," he said.
Raines reportedly earned $90 million during his time as Fannie Mae’s CEO. Earlier this year, in a settlement with the government, he agreed to give up various benefits from Fannie Mae estimated to be worth about $25 million dollars.
In the July 16, 2008 report, The Washington Post reported that Raines had informally advised the Obama presidential campaign on mortgage and housing policy matters.
When that became the subject of a McCain campaign video, the Obama campaign released a statement by Raines, who said: “I am not an advisor to Barack Obama, nor have I provided his campaign with advice on housing or economic matters.”