16 while a fico score of 660 was highlighted as the

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16 While a FICO score of 660 was highlighted as the minimum threshold by Fannie and Freddie, a score of 620 or below was considered too low to meet GSE standards. Ed Pinto focuses on the 660 score to show the transition of the GSEs into riskier lending. 17 See Favilukis, Jack, Sydney Ludvigson, and Stijn Van Nieuwerburgh (2010) “The Macroeconomic Effects of Housing Wealth, Housing Finance, and Limited Risk-Sharing in General Equilibrium”, Working Paper, New York University Stern School of Business, for a formal model of this credit expansion and the associated house price appreciation. 18 Alt-A is a short name for alternative-to-agency (such as those of the GSEs) mortgages. An Alt-A mortgage is a type of U.S. mortgage that is considered riskier than prime mortgages and less risky than subprime, the riskiest category. Typically Alt-A mortgages are characterized by borrowers with less than full documentation, lower credit scores, higher loan-to-values, and more investment properties. A-minus is related to Alt-A, with some lenders categorizing them the same, but A-minus is traditionally defined as mortgage borrowers with a FICO credit score of below 680 while Alt-A is traditionally defined as loans lacking full documentation. Alt-A mortgages may have excellent credit but may not meet underwriting criteria for other reasons. 19 This point of a regulatory race to the bottom is not new to the economic theory of the political economy of regulation. If a set of institutions (Fannie and Freddie) enjoys stronger guarantees but lower capital requirements, then other institutions (investment banks) with access to weaker guarantees employ lobbying for similar treatment. In turn, the regulator of these other institutions, if sufficiently captured (even if just cognitively so), would adopt lower capital requirements also. If anything, this theory would suggest that the first set of institutions that enjoy stronger guarantees should be subject to higher capital requirements to avoid the “regulatory race to the bottom” (see Acharya, Viral V., “Is the International Convergence of Capital Adequacy Regulation Desirable?”, Journal of Finance , 58(6) December 2003, 2745-2781). 20 Viral V Acharya, Thomas Cooley, Matthew Richardson, and Ingo Walter (2010) “Manufacturing Tail Risk: A Perspective on the Financial Crisis of 2007-09”, Foundations and Trends® in Finance , Vol. 4: No. 4, 247-325, argue that the manufacturing of tail risk on certain mortgage-backed securities was a central feature of the financial crisis. 21 These off-balance sheet vehicles were funded with 100% leverage on their own, holding long-maturity mortgage and corporate loan assets, but funded overnight by asset-backed commercial paper (ABCP) – a form of wholesale finance mainly from money-market funds. This form of off-balance sheet leverage grew in size from $600 billion to over $1,200 billion in just three years from 2004 to 2007. See Acharya, Viral V., Philipp Schnabl and Gustavo Suarez, 2009, “Securitization without risk transfer”, working paper, New York University Stern School of Business.
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