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 FINANCIAL CRISIS INQUIRY COMMISSION REPORT

defaults of the mortgages in the pool. Commensurate with this high risk, it provided
the highest yields (see figure .). In the Citigroup deal, as was common, this piece of
the deal was not rated at all. Citigroup and a hedge fund each held half the equity
tranche. 
While investors in the lower-rated tranches received higher interest rates because
they knew there was a risk of loss, investors in the triple-A tranches did not expect
payments from the mortgages to stop. This expectation of safety was important, so
the firms structuring securities focused on achieving high ratings. In the structure of
this Citigroup deal, which was typical,  million, or , was rated triple-A.

GREATER ACCESS TO LENDING:
“A BUSINESS WHERE WE CAN MAKE SOME MONEY”

As private-label securitization began to take hold, new computer and modeling tech-
nologies were reshaping the mortgage market. In the mid-s, standardized data
with loan-level information on mortgage performance became more widely avail-
able. Lenders underwrote mortgages using credit scores, such as the FICO score, de-
veloped by Fair Isaac Corporation. In , Freddie Mac rolled out Loan Prospector,
an automated system for mortgage underwriting for use by lenders, and Fannie Mae
released its own system, Desktop Underwriter, two months later. The days of labori-
ous, slow, and manual underwriting of individual mortgage applicants were over,
lowering cost and broadening access to mortgages.
This new process was based on quantitative expectations: Given the borrower, the
home, and the mortgage characteristics, what was the probability payments would be
on time? What was the probability that borrowers would prepay their loans, either
because they sold their homes or refinanced at lower interest rates?
In the s, technology also affected implementation of the Community Rein-
vestment Act (CRA). Congress enacted the CRA in  to ensure that banks and
thrifts served their communities, in response to concerns that banks and thrifts were
refusing to lend in certain neighborhoods without regard to the creditworthiness of
individuals and businesses in those neighborhoods (a practice known as redlining). 
The CRA called on banks and thrifts to invest, lend, and service areas where they
took in deposits, so long as these activities didn’t impair their own financial safety
and soundness. It directed regulators to consider CRA performance whenever a bank
or thrift applied for regulatory approval for mergers, to open new branches, or to en-
gage in new businesses. 
The CRA encouraged banks to lend to borrowers to whom they may have previ-
ously denied credit. While these borrowers often had lower-than-average income, a
 study indicated that loans made under the CRA performed consistently with
the rest of the banks’ portfolios, suggesting CRA lending was not riskier than the
banks’ other lending. “There is little or no evidence that banks’ safety and sound-

ness have been compromised by such lending, and bankers often report sound busi-
ness opportunities,” Federal Reserve Chairman Alan Greenspan said of CRA lending
in . 