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moderate income borrowers better access to mortgage credit through Fannie Mae
and Freddie Mac. Th is eff ort, probably stimulated by a desire to increase home
ownership, ultimately became a set of regulations that required Fannie and Freddie
to reduce the mortgage underwriting standards they used when acquiring loans
from originators. As the Senate Committee report said at the time, “Th e purpose of
[the aff ordable housing] goals is to facilitate the development in both Fannie Mae
and Freddie Mac of an ongoing business eff ort that will be fully integrated in their
products, cultures and day-to-day operations to service the mortgage fi nance needs
8
of low-and-moderate-income persons, racial minorities and inner-city residents.”
Th e GSE Act, and its subsequent enforcement by HUD, set in motion a series of
changes in the structure of the mortgage market in the U.S. and more particularly
the gradual degrading of traditional mortgage underwriting standards. Accordingly,
in this dissenting statement, I will refer to the subprime and Alt-A mortgages that
were acquired because of the aff ordable housing AH goals, as well as other subprime
and Alt-A mortgages, as non-traditional mortgages, or NTMs
Th e GSE Act was a radical departure from the original conception of the GSEs
as managers of a secondary market in prime mortgages. Fannie Mae was established
as a government agency in the New Deal era to buy mortgages from banks and other
loan originators, providing them with new funds with which to make additional
mortgages. In 1968, it was authorized to sell shares to the public and became a
9
government-sponsored enterprise (GSE) —a shareholder-owned company with a
government mission to maintain a liquid secondary market in mortgages. Freddie
Mac was chartered by Congress as another GSE in 1970. Fannie and Freddie carried
out this mission eff ectively until the early 1990s, and in the process established
conservative lending standards for the mortgages they were willing to purchase,
including such elements as downpayments of 10 to 20 percent, and minimum credit
standards for borrowers.
Th e GSE Act, however, created a new “mission” for Fannie Mae and Freddie
Mac—a responsibility to support aff ordable housing—and authorized HUD to
establish and administer what was in eff ect a mortgage quota system in which a
certain percentage of all Fannie and Freddie mortgage purchases had to be loans to
low-and- moderate income (LMI) borrowers—defi ned as persons with income at or
below the median income in a particular area or to borrowers living in certain low
income communities. Th e AH goals put Fannie and Freddie into direct competition
with the FHA, which was then and is today an agency within HUD that functions as
the federal government’s principal subprime lender.

7 Low income is usually defi ned as 80 percent of area median income (AMI) and moderate income as
100 percent of AMI.
8 Report of the Committee on Banking Housing and Urban Aff airs, United States Senate to accompany
S. 2733. Report 102-282, May 15, 1992, pp. 34-5.
9 Fannie and Freddie were considered to be government sponsored enterprises because they had been
chartered by Congress and were given various privileges (such as exemption from the Securities Act of
1933 and the Securities Exchange Act of 1934) and a line of credit at the Treasury that signaled a special
degree of government support. As a result, the capital markets (which continued to call them “Agencies”)
assumed that in the event of fi nancial diffi culties the government would stand behind them. Th is implied
government backing gave them access to funding that was lower cost than any AAA borrower and oft en
only a few basis points over the applicable Treasury rate.