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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.