Fannie Mae and Freddie Mac’s decision to back ever-riskier mortgages was the direct consequence of competitive pressures combined with the political goal of increasing homeownership, claimed two former Fannie executives today before the Financial Crisis Inquiry Commission:
Just before the housing bust, executives at the Washington-based mortgage company worried about losing relevance as Wall Street companies issued mortgage securities and stole market share, according to a July 2005 internal presentation disclosed by the panel.
While executives were aware of “growing concern about housing bubbles,” the presentation said, they also feared the company could come a “niche player” amid competition from Wall Street.
…Short-term concerns ultimately prevailed, and Fannie dived increasingly into riskier loans, like those that didn’t require proof of income.
Then, as the market turned down, Mudd noted “virtually every other housing sector investor fled the market.” Fannie and sibling company Freddie Mac “were specifically required to take up the slack.”
While executives were aware of “growing concern about housing bubbles,” the presentation said, they also feared the company could come a “niche player” amid competition from Wall Street.
…Short-term concerns ultimately prevailed, and Fannie dived increasingly into riskier loans, like those that didn’t require proof of income.
Then, as the market turned down, Mudd noted “virtually every other housing sector investor fled the market.” Fannie and sibling company Freddie Mac “were specifically required to take up the slack.”
This competitive pressure, however, was itself the consequence of politics — government had already made it clear to housing investors that the priority was to increase home ownership, regardless of the financial consequences.
One of the commissioners, Peter Wallison, wrote this in December:
New research by Edward Pinto, a former chief credit officer for Fannie Mae and a housing expert, has found that from the time Fannie and Freddie began buying risky loans as early as 1993, they routinely misrepresented the mortgages they were acquiring, reporting them as prime when they had characteristics that made them clearly subprime or Alt-A.
In general, a subprime mortgage refers to the credit of the borrower. A FICO score of less than 660 is the dividing line between prime and subprime, but Fannie and Freddie were reporting these mortgages as prime, according to Mr. Pinto. Fannie has admitted this in a third-quarter 10-Q report in 2008.
An Alt-A mortgage is one in which the quality of the mortgage or the underwriting was deficient; it might lack adequate documentation, have a low or no down payment, or in some other way be more likely than a prime mortgage to default. Fannie and Freddie were also reporting these mortgages as prime, according to Mr. Pinto.
In general, a subprime mortgage refers to the credit of the borrower. A FICO score of less than 660 is the dividing line between prime and subprime, but Fannie and Freddie were reporting these mortgages as prime, according to Mr. Pinto. Fannie has admitted this in a third-quarter 10-Q report in 2008.
An Alt-A mortgage is one in which the quality of the mortgage or the underwriting was deficient; it might lack adequate documentation, have a low or no down payment, or in some other way be more likely than a prime mortgage to default. Fannie and Freddie were also reporting these mortgages as prime, according to Mr. Pinto.
That no one from Fannie or Freddie has gone to jail yet is itself a crime.
