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 FINANCIAL CRISIS INQUIRY COMMISSION REPORT

reported billions of dollars of net losses on these loans and securities, beginning in
the third quarter of .
But many in Treasury believed the country needed the GSEs to provide liquidity
to the mortgage market by purchasing and guaranteeing loans and securities at a
time when no one else would. Paulson told the FCIC that after the housing market
dried up in the summer of , the key to getting through the crisis was to limit the
decline in housing, prevent foreclosures, and ensure continued mortgage funding, all

of which required that the GSEs remain viable. However, there were constraints on
how many loans the GSEs could fund; they and their regulators had agreed to portfo-
lio caps—limits on the loans and securities they could hold on their books—and a
 capital surplus requirement.
So, even as each company reported billions of dollars in losses in  and ,
their regulator, the Office of Federal Housing Enterprise Oversight (OFHEO), loos-
ened those constraints. “From the fall of , to the conservatorships, it was a
tightrope with no safety net,” former OFHEO Director James Lockhart testified to

the FCIC. Unfortunately, the balancing act ultimately failed and both companies
were placed into conservatorship, costing the U.S. taxpayers  billion—so far.

“A GOOD TIME TO BUY”
In an August , , letter to Lockhart, Fannie Mae CEO Daniel Mudd sought im-
mediate relief from the portfolio caps required by the consent agreement executed in
May  following Fannie’s accounting scandal. “We have witnessed growing evi-
dence of turmoil in virtually all sectors of the housing finance market,” Mudd wrote,
and “the immediate crisis in subprime is indicative of a serious liquidity event im-
pacting the entire credit market, not just subprime.” As demand for purchasing loans

dried up, large lenders like Countrywide kept loans that they normally securitized,
and smaller lenders went under. A number of firms told Fannie that they would stop
making loans if Fannie would not buy them.
Mudd argued that a relaxed cap would let his company provide that liquidity. “A
moderate,  percent increase in the Fannie Mae portfolio cap would provide us with
flexibility . . . and send a strong signal to the market that the GSEs are able to address
liquidity events before they become crises.” He maintained that the consent agree-
ment allowed OFHEO to lift the cap to address “market liquidity issues.” Moreover,
the company had largely corrected its accounting and internal control deficiencies—
the primary condition for removing the cap. Finally, he stressed that the GSEs’ char-
ter required Fannie to provide liquidity and stability to the market. “Ultimately,”
Mudd concluded, “this request is about restoring market confidence that the GSEs
can fulfill their stabilizing role in housing.” 
Fannie Mae executives also saw an opportunity to make money. Because there
was less competition, the GSEs could charge higher fees for guaranteeing securities
and pay less for loans and securities they wanted to own, enabling them (in theory)

to increase returns. Tom Lund, a longtime Fannie Mae executive who led the firm’s
single-family business, told the FCIC that the market moved in Fannie Mae’s favor af-