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Peter J. Wallison 463

One of the many myths about the fi nancial crisis is that Wall Street banks led
the way into subprime lending and the GSEs followed. Th e Commission majority’s
report adopts this idea as a way of explaining why Fannie and Freddie acquired
so many NTMs. Th is notion simply does not align with the facts. Not only were
Wall Street institutions small factors in the subprime PMBS market, but well before
2002 Fannie and Freddie were much bigger players than the entire PMBS market
in the business of acquiring NTM and other subprime loans. Table 7, page 504,
shows that Fannie and Freddie had already acquired at least $701 billion in NTMs
by 2001. Obviously, the GSEs did not have to follow anyone into NTM or subprime
lending; they were already the dominant players in that market before 2002. Table
7 also shows that in 2002, when the entire PMBS market was $134 billion, Fannie
and Freddie acquired $206 billion in whole subprime mortgages and $368 billion in
other NTMs, demonstrating again that the GSEs were no strangers to risky lending
well before the PMBS market began to develop.
Further evidence about which fi rms were fi rst into subprime or NTM lending
is provided by Fannie’s 2002 10-K. Th is disclosure document reports that 14 percent
of Fannie’s credit obligations (either in portfolio or guaranteed) had FICO credit
scores below 660 as of December 31, 2000, 16 percent at the end of 2001 and 17
31
percent at the end of 2002. So Fannie and Freddie were active and major buyers
of subprime loans in years when the PMBS market had total issuances of only $55
billion (2000) and $94 billion (2001). In other words, it would be more accurate
to say that Wall Street followed Fannie and Freddie into subprime lending rather
than vice versa. At the same time, the GSEs’ purchases of subprime whole loans
throughout the 1990s stimulated the growth of the subprime lending industry,
which ultimately became the mainstay of the subprime PMBS market in the 2000s.
2005 was the biggest year for PMBS subprime issuances, and Ameriquest
($54 billion) and Countrywide ($38 billion) were the two largest issuers in the top
25. Th ese numbers were still small in relation to what Fannie and Freddie had been
buying since data became available in 1997. Th e total in Table 7 for Fannie and
Freddie between 1997 and 2007 is approximately $1.5 trillion for subprime loans
and over $4 trillion for all NTMs as a group.
Because subprime PMBS were rich in NTM loans eligible for credit under
HUD’s AH goals, Fannie and Freddie were also the largest individual purchasers
of subprime PMBS from 2002 to 2006, acquiring 33 percent of the total issuances,
32
or $579 billion. In Table 3 above, which organizes mortgages by delinquency rate,
these purchases are included in line 1, which had the highest rate of delinquency.
Th ese were self-denominated subprime—designated as subprime by the lender
when originated—and thus had low FICO scores and usually a higher interest rate
than prime loans; many also had low downpayments and were subject to other
defi ciencies.
Ultimately, HUD’s policies were responsible for both the poor quality of
the subprime and Alt-A mortgages that backed the PMBS and for the enormous
size to which this market grew. Th is was true not only because Fannie and Freddie

31 2003 10-K, Table 33, p.84 http://www.sec.gov/Archives/edgar/data/310522/000095013303001151/
w84239e10vk.htm#031.
32 See Table 3 of “High LTV, Subprime and Alt-A Originations Over the Period 1992-2007 and Fannie,
Freddie, FHA and VA’s Role” found at http://www.aei.org/docLib/Pinto-High-LTV-Subprime-Alt-A.pdf.