Conformin g limit very high risk ltvs90 and fico620

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Conformin g Limit Very high risk LTVs>90 % and FICO<620 Conformi ng Limit Total PLS (All) (1)/(2) (1)/ [(1)+(4)] 2003 466 12.1 1839 103.2 13% 168 8.9 527 25% 74% 2004 262 8.8 898 211.8 53% 283 14.1 804 29% 48% 2005 236 7.1 899 221.3 57% 330 13.9 1139 26% 42% 2006 245 10.4 877 180 52% 240 12.4 1108 28% 51% 2007 363 20.3 1012 113.5 37% 54 2.4 665 36% 87%
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46 The SEC 10-K credit-risk filings of Fannie Mae are also revealing of the deterioration in mortgage loans that were purchased by the GSEs during the 2004-2007 period, either for their own portfolios or to be sold off to others. For example, 17% of the 2006 and 25% of the 2007 mortgages that Fannie bought had a loan-to-value ratio in excess of 80%. The fraction of loans with CLTVs greater than 95% went from 5% in 2004 to 15% in 2007. The borrowers also had lower credit scores: 17.4% of 2006 loans and 18% of 2007 loans had FICO scores below 660. A relatively large share was ARMs (16.6% in 2006 and 9% in 2007) or interest-only loans (15.2% in both years). The Alt-A fraction of purchases was 21.8% in 2006 and 16.7% in 2007, up from 12% in 2004. Finally, non-full documentation loans went from 18% in 2004 to 31% in 2007. If anything, Freddie Mac’s credit-risk profile was worse than Fannie’s. In 2004, 11% of the loans that Freddie bought had CLTVs above 100%, which increased to 37% by 2007. Interest-only loans grew from 2% to 20%, and low-FICO-score loans from 4% to 7%. As a final indication of its all-in approach to mortgage lending in 2007, note that mortgage loans with both FICO<620 and LTV>90% reached $20.3 billion, essentially double that of any other year. Clearly, the quality of GSE loans deteriorated substantially from 2003 to 2007. It seems that the GSEs were able to stretch the concept of a prime, conforming loan much beyond what its regulator had intended.
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47 Chapter 4: Too-Big-To-Fail “Once one agrees to share a canoe with a bear, it is hard to get him out without obtaining his agreement or getting wet.” - Congressional Budget Office, “Assessing the Public Costs and Benefits of Fannie Mae and Freddie Mac (1996). On October 5, 1999, in a speech entitled “Toward a 21 st Century Financial Regulatory System”, then Treasury Secretary Lawrence Summers, and later Director of the National Economic Council in the early Obama Administration, said: “Debates about systemic risk should also now include government-sponsored enterprises (GSEs), which are large and growing rapidly.” Several months later, on March 22, 2000, in remarks to the House Banking Committee, then Treasury Under-Secretary Gary Gensler, who later became the chairman of the U.S. Commodity Futures Trading Commission, testified in support of HR 3703 “Housing Finance Regulatory Improvement Act” – a bill to reign in Fannie Mae and Freddie Mac, the largest of the GSEs: “As the GSEs continue to grow and to play an increasingly central role in the capital markets, issues of potential systemic risk and market competition become more relevant.” Publicly expressing concerns about the growth in GSEs was somewhat of a mea culpa for the Clinton Administration, as they had been strong advocates for using the GSEs to push the public mission of affordable housing for low-income families. There was, however, reason to be worried. Over the eight years of the Clinton administration, Fannie Mae and Freddie Mac
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