FannieMae and FreddieMac are chartered to ensure mortgage banks have enough money to lend home buyers at low interest rates. They are supposed to ensure affordable housing, by maintaining market place liquidity.

What they have been doing though is purchasing Alt A and subprime loans. This explains the recent mounting losses that both lenders have been experiencing. The losses were inexplicable to me because FannieMae and FreddieMac guarantee conventional loans, or so I thought. The lowest risk loans - fully documented, lower LTV's, full amortization loans, best credit, MI covered loans.

Why were these two companies suffering losses?

Well, they had begun to venture into the temptation of the higher yields found in subprime and Alt A lending.

I found a Q&A sheet from August 07. The information about their loan portfolio is from 2006.

The quotes in this discussion are quite ironic. The report is very readable, just sad.

 "Accordingly, we believe that our guaranteed Alt-A loans have more favorable credit characteristics than the overall market of Alt-A loans, based on the following data for Alt- A loans in our single-family mortgage credit book of business (as of June 30, 2007)"

"We believe that the subprime loans in our single-family mortgage credit book of business have more favorable credit characteristics than the overall market of subprime loans based on the following data (based on subprime loans in our single-family mortgage credit book of business as of June 30, 2007):

• Our subprime loans are generally credit enhanced - 88 percent carry credit enhancement "

Does anyone know what a credit enhanced subprime loan is?

Here is an article from Inman dated from Aug 2007 around the same time as the above Q&A discussion. Also full of irony. The article may actually be referring to the Q&A discussion, or perhaps to the annual 10K report filed at that time. 

"Fannie Mae officials said they believe the Alt-A loans they guarantee have "more favorable credit characteristics than the overall market of Alt-A loans," because the loans must comply with Fannie's guidelines, and are originated by lenders who specialize in prime loans."

At this point, credit risk mismanagement has placed FannieMae in real jeopardy of failing to meet its charter in maintaining market liquidity and ensuring affordable housing. They already are pulling back in conventional lending. It is evidently not the high LTV conventional loans. The problem is that they stepped outside their charter and began investing in higher risk loans.

Someone needs to be held accountable for this behavior.

FannieMae quotes:

"Since we guarantee our Fannie Mae MBS, we are required to maintain high credit standards
when acquiring and financing mortgages."

"Fannie Mae's disciplined approach to underwriting loans has resulted
in a high quality, regionally diverse book of business. Fannie Mae's standards impact the
overall loan management process, from determining borrower and property eligibility through loan acquisition and property disposition."

Wall Street Journal - FannieMae loss exceeds forecast

Bloomberg - FannieMae 4th straight quarter loss

 FannieMae and FreddieMac have in my mind not followed their charter. Their managers and Congress have allowed these lenders to fall into the greed trap, pursuing higher returns and putting our conventional mortgage market at risk.

It is one thing for Bear Stearns, IndyMac and others to take on riskier mortgage loans. Fannie Mae and FreddieMac had no business doing so, with their charter and their privileged position and public trust.

Congress is being a little too quiet on this because they are themselves guilty in this.

Richard Smith

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