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6 this description is taken from bethany mclean the

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6 This description is taken from Bethany McLean, “The Fall of Fannie Mae,” Fortune , January 24, 2005. 7 It should be noted, however, that because house prices increased over the 1995-2006 period, the collateral underlying this credit numerator increased in value, therefore decreasing the overall credit risk. However, as chapter 2 below shows, the risk profile of these mortgages was also increasing over this period, thus mitigating this house price effect. 8 Using an alternative approach based on options pricing, economists Debbie Lucas and Bob McDonald report a somewhat smaller value of $28 billion, though a recent update by the authors in show that this value can increase with more realistic modeling. Of some interest, they show a value-at-risk at the 5% level for Fannie Mae (Freddie Mac) of $165 billion ($112 billion), eerily close to their losses in the current crisis if one is to believe the CBO estimates. ( Lucas, Deborah and McDonald, Robert, “An options-based approach to evaluating the risk of Fannie Mae and Freddie Mac,” Journal of Monetary Economics , 2006, vol. 53(1) 1, pp. 155-176, and “Valuing Government Guarantees: Fannie and Freddie Revisited,” 2009, forthcoming in NBER book, Measuring and Managing Federal Financial Risk , edited by Deborah Lucas.) 9 Speech at the Conference on Housing, Mortgage Finance, and the Macroeconomy, Federal Reserve Bank of Atlanta, Atlanta, Georgia, dedicated to the theme of Government-sponsored enterprises : http://www.federalreserve.gov/boarddocs/speeches/2005/20050519/ 10 Within these mission goals, there were also so-called subgoals that stipulate the fraction of the goal that must be achieved through new home purchases, as opposed to through mortgage refinancing.
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145 11 Housing and Community Development Act of 1992, Title XIII, “Government Sponsored Enterprises”, Sec. 1354 “Review of Underwriting Guidelines.” 12 See Ambrose, Brent W. , Temkin, Kenneth , The Urban Institute and Thomas G. Thibodeau, 2002, “An Analysis of the Effects of the GSE Affordable Goals on Lo- and Moderate-Income Families ,” U.S. Department of Housing and Urban Development, Office of Policy Development and Research. 13 As mentioned above, the GSEs generally required loans with LTVs>80% to have private mortgage insurance. An important point, however, is that while private mortgage insurance helps insulate some of the GSE losses from a defaulted mortgage, the high LTVs also make default more likely. As is well documented, mortgage defaults usually create dead-weight losses that are associated with spillover effects in the neighborhood, disinvestment in the property, etc… 14 See a detailed analysis by Ed Pinto, available at: http://www.aei.org/docLib/Pinto-High-LTV- Subprime-Alt-A.pdf . 15 The Fair Isaac Corporation—FICO—provides an analysis of the creditworthiness of an individual by looking at a variety of factors, including payment history, debt ratio, types of credit, and number of credit inquiries. FICO scores range from 300–850 with higher scores signifying stronger creditworthiness.
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