(FORTUNE Magazine) – It would be hard to find a less likely champion of diversity than a tall guy of Norwegian descent from Benson, Minn. Yet Jim Johnson has made lending to minority homebuyers and hiring minority workers central to his eight-year stewardship of Fannie Mae, based in Washington, D.C. Johnson, a former aide to Vice President Walter Mondale, marched from Selma to Montgomery with Martin Luther King Jr. in 1965 and has been battling discrimination ever since. Bringing business to minorities, he says, "is morally right."

It is also very profitable. For years, low- and moderate-income families, many of them minorities, were the bane of the mortgage industry. They were simply too large a risk. But where others saw red--and occasionally red lines--Johnson saw green. In 1994 he pledged that by decade's end, Fannie Mae would back $1 trillion of mortgages to ten million low- and middle-income borrowers. In 1993, 13% of the single-family homes financed by Fannie Mae were bought by minorities; last year, the figure was nearly 18%. And Johnson says proudly, "It is a business on which we get an attractive rate of return."

Earning profits while also helping others is what Fannie Mae is all about. Its congressionally chartered mission is to make it easier and cheaper for working-class families to own homes. It does this mostly by spreading the risk around in the secondary mortgage market, which trades bundled mortgages as if they were securities. But it also works to break down all sorts of barriers to ownership. It formed a foundation to educate minorities about how to get a mortgage. It redesigned its lending programs to assist cash-strapped minority buyers. And it is about to set an example from the top. Johnson's designated successor as CEO is Frank Raines, who next year will become only the second African American to head a FORTUNE 500 company. Says Raines: "Diversity is part of who we are."

A big part. Minorities constitute 39% of Fannie Mae's work force, 26% of its managers, and 19% of its officers. The progress doesn't stop there. Fannie Mae has made sure the companies it does business with also reflect the racial composition of the country at large. Last year nearly 20% of its outside vendors and 15% of the lending institutions it did mortgage business with were owned by minorities or women.

The company does some of this for political reasons. It derives huge advantages in the financial markets from its quasi-governmental status, including an exemption from state and local income taxes. Hence it is careful not to run afoul of the powers that be. It has woven itself tightly into the fabric of official Washington, routinely hiring as its top executives the creme de la creme of former government appointees. Raines himself just finished his second major stint in the executive branch, this time as White House budget director, a cabinet-level position. The company also retains the priciest lobbyists in town and never stints on making campaign contributions. Keeping its minority lending and hiring levels high is insurance against attacks by antigovernment Republicans who periodically question the wisdom of even tacitly supporting a shareholder-owned enterprise.

But its actions on the diversity front far exceed anything the government has ever asked of it. And Raines is a legitimate hero among African Americans. Growing up in Seattle, his family had to survive on welfare for a time when his father fell ill. Even though he's a graduate of Harvard and Harvard Law, he likes to tell audiences that he also graduated from AFDC (Aid to Families with Dependent Children).

Raines is making his second appearance at Fannie Mae. He was handpicked by Johnson in 1991 to be one of the company's top three officers after having spent a dozen years as an investment banker at Lazard Freres. He says he feels obliged to proselytize other blacks on their way up. "More are coming in, and more are surviving," he says. "The struggle we have is to make sure the best and the brightest choose business as a career. That has not always been the case with black Americans." At Fannie Mae, an intricate mentoring system has been put in place to help that happen.

The greatest achievement of Fannie Mae, though, is its success in turning a societal problem into a growth opportunity. Nearly three-quarters of whites but fewer than half of blacks and Hispanics own their homes. "If you are looking for untapped markets," says Paine Webber's Gary Gordon, "the minority market is probably your best shot." Fannie Mae was looking for just such a market, and while its goals may be altruistic, its methods are pure MBA. First it did market research. In 1992 its National Housing Survey revealed that African Americans were willing to make extraordinary sacrifices to buy a home, including taking a second job, putting off retirement, and driving longer distances to get to work. But many didn't know how to acquire a mortgage and lacked the funds for a down payment and closing costs. Fannie Mae set to work to solve both problems.

Its foundation spent tens of millions of dollars on advertising and created partnerships with Black Entertainment Television and the Spanish-language Univision to encourage low- and moderate-income consumers to learn more about homebuying. Five million people, including 1.5 million blacks and 600,000 Hispanics, responded by asking for more information. A survey by the foundation this year showed that 74% of African Americans were confident they could qualify for mortgages, up from 49% two years ago.

Fannie Mae has put the mortgage money in their hands by creating new lending programs. Last year it introduced its Flexible 97 mortgage, which allows good credit risks to borrow with a down payment as low as 3%. On an experimental basis, low-income customers in targeted parts of inner cities have been permitted to get mortgages that normally would be out of their reach. The company has also worked over the years to reduce the lenders' costs of originating a mortgage by as much as $1,000 per transaction, which can make a big difference on a small mortgage. By 1996, Fannie Mae was the largest source of funds for minority borrowers, exceeding the Federal Housing Administration.

Yet the company is still pushing. "We have more to do," says Johnson. "We will not be satisfied until Fannie Mae is, and is recognized by all, as a world-class model of diversity." It's hard to know whether that's the idealist or the capitalist talking. Does it matter?

--Jeffrey H. Birnbaum