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THE MORTGAGE MACHINE 

As the scandals unfolded, subprime private label mortgage–backed securities
(PLS) issued by Wall Street increased from  billion in  to  billion in 
(shown in figure .); the value of Alt-A mortgage–backed securities increased from
 billion to  billion. Starting in  for Freddie and  for Fannie, the
GSEs—particularly Freddie—became buyers in this market. While private investors
always bought the most, the GSEs purchased . of the private-issued subprime
mortgage–backed securities in . The share peaked at  in  and then fell
back to  in . The share for Alt-A mortgage–backed securities was always
lower.  The GSEs almost always bought the safest, triple-A-rated tranches. From
 through , the GSEs’ purchases declined, both in dollar amount and as a
percentage.
These investments were profitable at first, but as delinquencies increased in 
and , both GSEs began to take significant losses on their private-label mortgage–
backed securities—disproportionately from their purchases of Alt-A securities. By
the third quarter of , total impairments on securities totaled  billion at the
two companies—enough to wipe out nearly  of their pre-crisis capital. 
OFHEO knew about the GSEs’ purchases of subprime and Alt-A mortgage–
backed securities. In its  examination, the regulator noted Freddie’s purchases of
these securities. It also noted that Freddie was purchasing whole mortgages with
“higher risk attributes which exceeded the Enterprise’s modeling and costing capabil-
ities,” including “No Income/No Asset loans” that introduced “considerable risk.”
OFHEO reported that mortgage insurers were already seeing abuses with these
loans.  But the regulator concluded that the purchases of mortgage-backed securi-
ties and riskier mortgages were not a “significant supervisory concern,” and the ex-
amination focused more on Freddie’s efforts to address accounting and internal
deficiencies.  OFHEO included nothing in Fannie’s report about its purchases of
subprime and Alt-A mortgage–backed securities, and its credit risk management was
deemed satisfactory. 
The reasons for the GSEs’ purchases of subprime and Alt-A mortgage–backed se-
curities have been debated. Some observers, including Alan Greenspan, have linked
the GSEs’ purchases of private mortgage–backed securities to their push to fulfill their
higher goals for affordable housing. The former Fed chairman wrote in a working pa-
per submitted as part of his testimony to the FCIC that when the GSEs were pressed to
“expand ‘affordable housing commitments,’ they chose to meet them by investing
heavily in subprime securities.”  Using data provided by Fannie Mae and Freddie
Mac, the FCIC examined how single-family, multifamily, and securities purchases
contributed to meeting the affordable housing goals. In  and , Fannie Mae’s
single- and multifamily purchases alone met each of the goals; in other words, the en-
terprise would have met its obligations without buying subprime or Alt-A mortgage–
backed securities. In fact, none of Fannie Mae’s  purchases of subprime or Alt-A
securities were ever submitted to HUD to be counted toward the goals.
Before ,  or less of the GSEs’ loan purchases had to satisfy the affordable
housing goals. In  the goals were increased above ; but even then, single-
and multifamily purchases alone met the overall goals.  Securities purchases did, in