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THE MORTGAGE MACHINE
housing goals, and that the goals became a factor in the decision to increase pur-
chases of private label securities.
Overall, while the mortgages behind the subprime mortgage–backed securities
were often issued to borrowers that could help Fannie and Freddie fulfill their goals,
the mortgages behind the Alt-A securities were not. Alt-A mortgages were not gener-
ally extended to lower-income borrowers, and the regulations prohibited mortgages
to borrowers with unstated income levels—a hallmark of Alt-A loans—from count-
ing toward affordability goals. Levin told the FCIC that they believed that the pur-
chase of Alt-A securities “did not have a net positive effect on Fannie Mae’s housing
goals.” Instead, they had to be offset with more mortgages for low- and moderate-
income borrowers to meet the goals.
Fannie and Freddie continued to purchase subprime and Alt-A mortgage–backed
securities from to and also bought and securitized greater numbers of
riskier mortgages. The results would be disastrous for the companies, their share-
holders, and American taxpayers.
COMMISSION CONCLUSIONS ON CHAPTER 7
The Commission concludes that the monetary policy of the Federal Reserve,
along with capital flows from abroad, created conditions in which a housing bub-
ble could develop. However, these conditions need not have led to a crisis. The
Federal Reserve and other regulators did not take actions necessary to constrain
the credit bubble. In addition, the Federal Reserve’s policies and pronouncements
encouraged rather than inhibited the growth of mortgage debt and the housing
bubble.
Lending standards collapsed, and there was a significant failure of accounta-
bility and responsibility throughout each level of the lending system. This in-
cluded borrowers, mortgage brokers, appraisers, originators, securitizers, credit
rating agencies, and investors, and ranged from corporate boardrooms to individ-
uals. Loans were often premised on ever-rising home prices and were made re-
gardless of ability to pay.
The nonprime mortgage securitization process created a pipeline through
which risky mortgages were conveyed and sold throughout the financial system.
This pipeline was essential to the origination of the burgeoning numbers of high-
risk mortgages. The originate-to-distribute model undermined responsibility and
accountability for the long-term viability of mortgages and mortgage-related se-
curities and contributed to the poor quality of mortgage loans.
(continues)
