All the Devils Are Here [116]
Putting triple-A subprime securities on its books was, like some of Fannie’s other methods of meeting its housing goals, a stupid pet trick. It didn’t help low-income Americans buy homes. Because the GSEs weren’t determining which loans they would buy, they lost the opportunity to enforce any standards on the lenders. And, as housing advocate Judy Kennedy points out, putting subprime securities on its books was a perversion of its affordable housing mission. From the government’s perspective, GSEs existed to buy up loans to poor and middle-income borrowers—even if that came at the expense of its profits. By buying Wall Street’s securities, the GSEs were able to earn more of a return on their affordable housing investments, rather than less.
Fannie and Freddie turned out to be almost as clueless as your average investor. They, too, relied on the rating agencies, although Fannie did so with a tiny bit of caution. (“Although we invest almost exclusively in triple-A-rated securities, there is a concern that rating agencies may not be properly assessing the risk in these securities,” noted a Fannie internal document in the spring of 2005.) Not enough caution, however. After the crisis, HUD would report that the value of the Wall Street-created securities owned by Fannie and Freddie fell as much as 90 percent from the time of purchase.
The GSEs also began buying, guaranteeing, and selling those not-quite-subprime Alt-A mortgages. Fannie executives insist that they never bought or guaranteed more than a few billion dollars worth of loans they considered subprime. They never guaranteed loans with layered risks, for instance. But many of the borderline loans they guaranteed would certainly be categorized as subprime by others in the marketplace. To this day, former Fannie Mae executives will insist that they chose the securities they guaranteed more carefully than others. And maybe they did; after the crisis, Fannie and Freddie defenders would point out that in every mortgage category, from prime to Alt-A to subprime, the GSEs’ loans defaulted at rates below the national average.
But just as with the purchase of triple-A securities, guaranteeing Alt-A loans had little to do with housing goals and everything to do with profits and market share. They were simply more profitable than guaranteeing thirty-year fixed loans. “We were lured into it by the big margins,” says a former executive. Both companies got warnings about the true state of market—Fannie from the outside and Freddie from the inside. Michelle Leigh, a vice president at IndyMac, later claimed in a lawsuit that she tried to warn Fannie about the Alt-A loans it was buying from IndyMac, which were riddled with problems. Fannie didn’t respond, and increased its purchases of loans from the company, according to the lawsuit.
Over at Freddie, chief credit officer David Andrukonis warned the company’s new CEO, Dick Syron, the former chairman of the Boston Federal Reserve, about the riskiness of no-income, no-asset loans. (They were called NINA loans.) “Freddie Mac should withdraw from the NINA market as soon as practical,” Andrukonis wrote in the fall of 2004. “Today’s NINA appears to target borrowers who would have trouble qualifying for a mortgage if their financial position were adequately disclosed.” He added, “What better way to highlight our sense of mission than to walk away from profitable business because it hurts the borrowers we are trying to serve?”
Between 2005 and 2007, about one in five mortgages Fannie and Freddie purchased or insured was Alt-A or subprime, according to a study by Jason Thomas. By the end of 2007, Fannie Mae had $350 billion in Alt-A exposure and another $166 billion in exposure to mortgages that it defined as subprime or whose recipients had FICO scores of less than 620. Freddie had $205 billion in Alt-A exposure and $173 billion in exposure