There was nothing remarkable about the announcement on Feb. 23 that Fannie Mae (FNM ) was shutting down its foundation at the end of April. As part of a broader alignment of resources, CEO Daniel Mudd said, Fannie would move all philanthropic work in-house to "better serve our mission." But the mortgage giant might have had another reason for closing the nation's largest nonprofit focused on low-income housing: increased scrutiny by lawmakers and regulators.
BusinessWeek has learned that the Internal Revenue Service is looking into Fannie's charitable work and related tax deductions over the years. According to former executives at Fannie and documents reviewed by BusinessWeek, the IRS is trying to determine whether the company used the foundation and other charities to curry favor with members of Congress and whether it improperly wrote off those costs. Last year the Senate Finance Committee started investigating alleged abuses of the foundation's tax-exempt status and accusations that the nonprofit was, in effect, another lobbying and marketing arm for Fannie. "The foundation's closing doesn't answer questions about potential inappropriate political activity in the past, and it could raise questions about future transparency from Fannie Mae for its charitable activities," says Iowa Senator Chuck Grassley, the top Republican on the Senate Finance Committee. The IRS and the foundation declined to comment.
Created in 1979, the Fannie Mae Foundation has given out more than $1 billion. In 2006 it awarded $34.5 million in grants to 300 nonprofit groups, money welcomed by small charities that often operate on a shoestring. "They've been critical[ly important]," says Bart Harvey, chairman and CEO of the nonprofit housing developer Enterprise Community Partners, which has received more than $8 million from the foundation since 2000.
Yet that generosity came with strings attached, say some former Fannie executives, grant recipients, and nonprofit advocates. In applications for funding, nonprofits were asked to list their political contacts in a section labeled "franchise value." Those so-called affinity contacts--a former congressional aide, a lawmaker's barber, a senator's pastor--helped populate a database at Fannie that at one point had roughly 4,000 people with a direct connection to a member of Congress. "They were using charitable grants to strengthen, advance, and carry out the political and lobbying agenda," says Fred Wertheimer, president and CEO of campaign finance watchdog Democracy 21. "It was the political equivalent of a quid pro quo." Says Bruce Marks, CEO of the Neighborhood Assistance Corp. of America, a low-income housing advocate: "Many institutions rely on Fannie Mae and understand those funds are contingent on public support for its policies. Fannie Mae has intimidated virtually all of them into remaining silent."
The foundation appears to have walked a fine line in its dealings with politicians. It regularly hosted regional housing fairs and paid for politicos to attend a three-week management program at Harvard University's John F. Kennedy School of Government. It has also spent millions supporting politically aligned groups such as the Congressional Black Caucus Foundation, Congressional Hispanic Caucus Institute, Metropolitan Mayors Caucus, and National Conference of State Legislatures. The Fannie Mae Foundation has, according to tax filings, donated at least $600,000 to the Congressional Black Caucus Foundation since 1989, money used in part to sponsor events like the CBCF's golf and tennis tournament. "They've been an important player," says Representative Mel Watt (D-N.C.), the past chairman of the Congressional Black Caucus and a current member of the CBCF. "[We] have worked closely with Fannie Mae or the foundation periodically to do things, sponsor housing fairs, [and] press Fannie Mae to provide support for housing initiatives in [members'] districts."
The concern is whether such efforts were made to bolster Fannie's business more than to advance philanthropic goals. Critics say the foundation helped to reinforce ties with various congressional groups forged by Fannie's in-house lobbyists. At times the two seemed indistinguishable: They often sponsored events in tandem. Both were big donors to the CBCF's annual awards gala in 2003 and a similar black-tie event for the Congressional Hispanic Caucus Institute in 2002. In 1998, then-CEO Jim Johnson hosted the opening ceremony of a lobbying and public relations office in Oklahoma, an event attended by former Oklahoma Governor Frank Keating and then-Senator Don Nickles (R-Okla.). But wearing his other hat as the foundation's chairman, Johnson also took the opportunity to announce $125,000 worth of grants to local charities.
It appears as though the investments have paid off. When Fannie's regulator, the Office of Federal Housing Enterprise Oversight, in 2004 accused the company of manipulating its earnings figures, CBC member William Lacy Clay (D-Mo.) declared the attack on then-CEO Franklin D. Raines, who is black, a "political lynching." Clay, one of many CBC affiliates to come to Fannie's defense at the time, declined to comment. Fannie also called on allies to oppose a legislative push in 2002 to end Fannie's longtime exemption from registering its stock and debt with the Securities & Exchange Commission. Its lobbyists helped draft statements issued by then-CBC Chairwoman Eddie Bernice Johnson (D-Tex.), Congressional Hispanic Caucus member Silvestre Reyes (D-Tex.), and former Representative Robert Ney (R-Ohio), Fannie and the politicians each admitted after the fact. A spokeswoman for Johnson stands by the 2002 comments: The congresswoman works with many groups, but "we are careful to make sure her words appear in print." A spokeswoman for Reyes said he works with a lot of organizations. Ney is in jail on an unrelated matter and could not be reached for comment.
The Fannie Foundation in some cases played an overt marketing role. During much of the 1990s it covered the bulk of Fannie's estimated $50 million annual advertising budget. That was possible because the foundation received a series of IRS exemptions from the usual restrictions on nonprofit ad campaigns that promote the corporate parent. Most of the ads highlighted how Fannie made homeownership possible. But after TV spots, featuring a minority couple worried that a Senate bill would prevent them from getting a mortgage, ran the week before votes were scheduled on the legislation, lawmakers accused Fannie and the foundation of coordinating the marketing in an effort to derail the bill. Although Fannie said it paid for those ads, they were eventually pulled; since then, Fannie and the foundation have discontinued almost all national TV advertising.
For years, Fannie's special status as a government-sponsored entity made it seem untouchable. That perception changed three years ago as allegations of accounting irregularities, aggressive lobbying, and management missteps surfaced. In 2005 the company laid off 20 lobbyists and publicists after a probe by the Housing & Urban Development Dept. found that it had improperly used staff "to obtain access to or influence members of Congress." In May, 2006, it settled its accounting issues with the SEC for $400 million. On Mar. 9 of this year the House introduced a new bill to overhaul the rules that govern Fannie. Now, as the company fights to rebuild its damaged reputation, the foundation may have become another headache Fannie just didn't need.
By Dawn Kopecki, with Adrian Reeves in Washington