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 FINANCIAL CRISIS INQUIRY COMMISSION REPORT

goal-qualifying and non-goal-qualifying loans purchased in the usual course of busi-
ness; on some of these loans, they might even lose money. The organizations also had
administrative and other costs related to the housing goals.
In June  Freddie Mac staff made a presentation to the Business and Risk
Committee of the Board of Directors on the costs of meeting its goals. From  to
, the cost of the targeted goal loans was effectively zero, as the goals were
reached through “profitable expansion” of the company’s multifamily business. Dur-
ing the refinance boom, the goals became more challenging and cost Freddie money
in the multifamily business; thus, only after  did meeting the multifamily and
single-family goals cost the GSE money. Still, only about  of all loans purchased by
Freddie between  and  were bought “specifically because they contribute to
the goals”—loans it labeled as “targeted affordable.” These loans did have higher than
average expected default rates, although Freddie also charged a higher fee to guaran-
tee them. From  through , Freddie’s costs of complying with the housing
goals averaged  million annually. The costs of complying with these goals took
into account three components: expected revenues, expected defaults, and foregone
revenues (based on an assumption of what they might have earned elsewhere). These
costs were only computed on the narrow set of loans specifically purchased to
achieve the goals, as opposed to goal-qualifying loans purchased in the normal
course of business.  For comparison, the company’s net earnings averaged just un-
der  billion per year from  to . 
In , Fannie Mae retained McKinsey and Citigroup to determine whether it
would be worthwhile to give up the company’s charter as a GSE, which—while af-
fording the company enormous benefits—imposed regulations and put constraints
on business practices, including its mission goals. The final report to Fannie Mae’s
top management, called Project Phineas, found that the explicit cost of compliance
with the goals from  to  was close to zero: “it is hard to discern a fundamen-
tal marginal cost to meeting the housing goals on the single family business side.” 
The report came to this conclusion despite the slightly greater difficulty of meeting
the goals in the  refinancing boom: the large numbers of homeowners refinanc-
ing, in particular those who were middle and upper income, necessarily reduced the
percentage of the pool that would qualify for the goals.
In calculating these costs, the consultants computed the difference between fees
charged on goal-qualifying loans and the higher fees suggested by Fannie’s own mod-
els. But this cost was not unique to goal qualifying loans. Across its portfolio, Fannie
charged lower fees than its models computed for goals loans as well as for non-goals
loans. As a result, goals loans, even targeted goals loans, were not solely responsible
for this cost. In fact, Fannie’s discount was actually smaller for many goal-qualifying
loans than for the others from  to .
Facing more aggressive goals in  and , Fannie Mae expanded initiatives
to purchase targeted goals loans. These included mortgages acquired under the My
Community Mortgage program, mortgages underwritten with looser standards, and
manufactured housing loans. For these loans, Fannie explicitly calculated the oppor-
tunity cost (foregone revenues based on an assumption of what they might have