paper about MBS

As an illustration of this consider data on fannie

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Unformatted text preview: As an illustration of this, consider data on Fannie Mae’s year-by-year mortgage purchases over the next decade from 1992 onwards. While complete data are not available, using the annual reports of Fannie and Freddie, and recently released data by the FHFA, Figure 2.1 graphs the share of risky mortgage loans each year, as defined by either LTV>90% or 80%<LTV<90%. 13 While it was commonly known that the FHA and VA made risky loans, it is less well-known that Fannie (and Freddie) already had a growing presence in the high LTV mortgage market during the 1990s. Fannie’s role generally increased over the next several years both in dollar amounts and market share. For example, from just 6% ($11.6 billion) of loans having LTVs>90% in 1992, by 1995, the number of loans with LTVs>90% had doubled to $20.9 billion and 19% of Fannie Mae’s purchases. Though the percentage of loans with LTVs>90% dropped to 13% by 2001, the dollar amounts increased substantially to $68.3 billion. While Freddie Mac’s annual reports provide only a snapshot of their mortgage holdings by year, the data tell a similar story. For example, in 1992, their mortgage book held just 3% of its loans with original LTVs>90% (and 13% with 80%<LTV<90%). The next year, this number 30 increased to 4% and 15% respectively, and by 1994 to 9% and 18%. By the late 90s, the number had steadied to around 10% of loans with LTVs>90% and 15% with 80%<LTV<90%. Figure 2-1: Fannie Mae Mortgage Purchases with High LTVs (1992-2002) Source: Annual reports of Fannie Mae, Inside Mortgage Finance As corroborating evidence, consider data on Fannie and Freddie’s mortgage holdings and insurance guarantees starting from the mid 1990s that have been put together by Ed Pinto, the former chief credit officer of Fannie Mae (1987-1989). 14 He provides data and analysis of two series: loans based on LTV, and loans based on FICO scores. 15 His data on LTV-based loans are generally consistent with Figure 2.1. The second series, that of “subprime” mortgage loans, makes an even stronger case for the earlier involvement by the GSEs in risky lending. While the mere mention of subprime now brings up an immediate negative connotation, subprime loans are generally considered to be ones that were granted to individuals with poor credit histories. The Pinto dataset combines so-called self-denominated subprime loans (i.e., those that were originated by subprime lenders or placed in subprime MBS) and loans with FICO credit scores below 660, the minimum threshold for standards set by Fannie and Freddie in the mid 1990s. 16 Pinto shows that the dollar volume of these loans hovered between $200 and $300 billion from 1997-2000, and, like the high LTV market above, Fannie, Freddie and the FHA held a significant share (ranging from 50-60%), with Fannie and Freddie contributing approximately one-half....
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As an illustration of this consider data on Fannie Mae’s...

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