Figure 2 1 fannie mae mortgage purchases with high

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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. For the next three years, Fannie and Freddie’s risky lending and private label mortgage-backed security purchases (in terms of FICO<660) went from $76 billion in 2000 to $175 billion in 2001 to $244 billion in 2002, with a 50% market share.
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31 2.3 Crossing the Rubicon The Rubicon River marks the boundary between the province of Gaul and Italy. It was Roman law that no general could cross this boundary southward towards Rome with his army, lest the general be mistaken for instigating a coup d’état. On January 10, 49 BC, Julius Caesar did just that, stating the infamous words “alea jacta est” (the die is cast). And history was forever changed. The entry of Fannie and Freddie into high-risk mortgages had a similar effect. The primary concern of their critics had been that of interest rate risk: Both GSEs held hundreds of billions of dollars of long-term fixed-rate mortgages in their portfolios. They funded these mortgages to a large extent with debt that had shorter maturities. Both GSEs claimed that they had engaged in derivative (interest rate swaps and options) transactions so as to eliminate any significant interest-rate risk from their overall asset-liability positions. But the specifics of the hedging were murky, and critics were doubtful. At the same time, however, the credit risks on the mortgages that the GSEs bought (and either held or securitized) were not considered a problem. The GSEs had a reputation for high underwriting standards, and their loss experiences supported this view. Except for a few years in the early 1970s for Freddie Mac, the credit loss experience of the GSEs had always been below the “guarantee fees” that they were charging on the MBS that they issued.
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Christopher Reinemann
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