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 FINANCIAL CRISIS INQUIRY COMMISSION REPORT

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the GSEs’ balance sheets. The value of risky loans and securities was swamping
their reported capital. By the end of , guaranteed and portfolio mortgages with
FICO scores less than  exceeded reported capital at Fannie Mae by more than
seven to one; Alt-A loans and securities, by more than six to one. Loans for which
borrowers did not provide full documentation amounted to more than ten times re-
ported capital. 
In mid-September, OFHEO relented and marginally loosened the GSEs’ portfolio
cap, from about  billion to  billion. It allowed Fannie to increase the amount
of mortgage loans and securities it owned by  per year—a power that Freddie al-
ready had under its agreement with OFHEO. OFHEO ruled out more dramatic in-
creases “because the remediation process is not yet finished, many safety and
soundness issues are not yet resolved, and the criteria in the Fannie Mae consent
agreement and Freddie Mac’s voluntary agreement have not been met.” 
As the year progressed, Fannie and Freddie became increasingly important to the
mortgage market. By the fourth quarter of , they were purchasing  of new
mortgages, nearly twice the  level. With  trillion in mortgages resting on ra-
zor-thin capital, the GSEs were doomed if the market did not stabilize. According to
Lockhart, “a withdrawal by Freddie Mac and Fannie Mae or even a drop in confi-
dence in the Enterprises would have created a self-fulfilling credit crisis.” 
In early October, Senator Charles Schumer and Representative Barney Frank in-
troduced similar bills to temporarily lift portfolio limits on the GSEs by  percent,
or approximately  billion, most of which would be designated for refinancing
subprime loans. The measures, which Federal Reserve Chairman Ben Bernanke
called “ill advised,” were not enacted. 
In November, Fannie and Freddie reported third-quarter losses of . billion and
 billion, respectively. At the end of December , Fannie reported that it had 
billion of capital to absorb potential losses on  billion of assets and . trillion
of guarantees on mortgage-backed securities; if losses exceeded ., it would be
insolvent. Freddie would be insolvent if losses exceeded .. Moreover, there were
serious questions about the validity of their “reported” capital.

“IT’S A TIME GAME . . . BE COOL”

In the first quarter, real gross domestic product fell . at an annual rate, reflecting
in part the first decline in consumer spending since the early s. The unemploy-
ment rate averaged  in the first three months of , up from a low of . in
spring of . As the Fed continued to cut interest rates, the economy was sinking
further into recession. In February, Congress passed the Economic Stimulus Act,
which raised the limits on the size of mortgages that Fannie and Freddie could pur-
chase, among other measures.
The push to get OFHEO to loosen requirements on the GSEs also continued.
Schumer pressed OFHEO to justify or lower the  capital surcharge; such a strin-
gent requirement, he wrote Lockhart on February , hampered Fannie’s ability to
provide financing to homeowners. 