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ALL IN                                                        


         earned elsewhere) along with the so-called cash flow cost, or the difference between
         their expected losses and expected revenue on these loans. For , as the market
         was peaking, Fannie Mae estimated the cash flow cost of the loans to be  million
         and the opportunity cost of the targeted goals loans  million, compared to net
         income that year to Fannie of . billion—a figure that includes returns on the goal-
         qualifying loans made during the normal course of business.   The targeted goals
         loans amounted to  billion, or ., of Fannie Mae’s  billion of single-family
         mortgage purchases in .   As the markets tightened in the middle of , the
         opportunity cost for that year was forecast to be roughly  billion. 
            Looking back at how the targeted affordable portfolio performed in comparison
         with overall losses, the  presentation at Freddie Mac took the analysis of the
         goals’ costs one step further. While the outstanding  billion of these targeted af-
         fordable loans was only  of the total portfolio, these were relatively high-risk loans
         and were expected to account for  of total projected losses. In fact, as of late ,
         they had accounted for only  of losses—meaning that they had performed better
         than expected in relation to the whole portfolio. The company’s major losses came
         from loans acquired in the normal course of business. The presentation noted that
         many of these defaulted loans were Alt-A. 






                       COMMISSION CONCLUSIONS ON CHAPTER 9
          The Commission concludes that firms securitizing mortgages failed to perform
          adequate due diligence on the mortgages they purchased and at times knowingly
          waived compliance with underwriting standards. Potential investors were not
          fully informed or were misled about the poor quality of the mortgages contained
          in some mortgage-related securities. These problems appear to have been signifi-
          cant. The Securities and Exchange Commission failed to adequately enforce its
          disclosure requirements governing mortgage securities, exempted some sales of
          such securities from its review, and preempted states from applying state law to
          them, thereby failing in its core mission to protect investors.
             The Federal Reserve failed to recognize the cataclysmic danger posed by the
          housing bubble to the financial system and refused to take timely action to con-
          strain its growth, believing that it could contain the damage from the bubble’s
          collapse.
             Lax mortgage regulation and collapsing mortgage-lending standards and
          practices created conditions that were ripe for mortgage fraud.
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