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that 16 percent of its credit obligations on mortgages had FICO scores of less than
660—the common defi nition of a subprime loan. Th ere are occasionally questions
about whether a FICO score of 660 is the appropriate dividing line between prime
37
and subprime loans. Th e federal bank regulators use 660 as the dividing line, and
in the credit supplement it published for the fi rst time with its 2008 10-K, Fannie
included loans with FICO scores below 660 to disclose its exposure to loans that
were other than prime. As of December 31, 2008, borrowers with a FICO of less
than 660 had a serious delinquency rate about four times that for borrowers with
38
a FICO equal to or greater than 660 (6.74% compared to 1.72%). Fannie did not
point out in its fi ling that a FICO score of less than 660 was considered a subprime
loan. Although at the end of 2005 Fannie was exposed to $311 billion in subprime
loans it reported in its 2005 10-K (not fi led with the SEC until May 2, 2007) that:
“Th e percentage of our single-family mortgage credit book of business consisting
of subprime mortgage loans or structured Fannie Mae MBS backed by subprime
mortgage loans was not material as of December 31, 2005.”[emphasis supplied] 39
Fannie was able to make this statement because it defi ned subprime loans
as loans it purchased from subprime lenders. Th us, in its 2007 10-K report, Fannie
stated: “Subprime mortgage loans are typically originated by lenders specializing
in these loans or by subprime divisions of large lenders, using processes unique to
subprime loans. In reporting our subprime exposure, we have classifi ed mortgage
loans as subprime if the mortgage loans are originated by one of these specialty lenders
40
or a subprime division of a large lender.” [emphasis supplied] Th e credit scores on
these loans, and the riskiness associated with these credit scores, were not deemed
relevant. Accordingly, as late as its 2007 10-K report, Fannie was able to make the
following statements, even though it is likely that at that point it held or guaranteed
enough subprime loans to drive the company into insolvency if a substantial number
of these loans were to default:
Subprime mortgage loans, whether held in our portfolio or backing Fannie Mae MBS,
represented less than 1% of our single-family business volume in each of 2007, 2006
41
and 2005. [emphasis supplied]
We estimate that subprime mortgage loans held in our portfolio or subprime mortgage
loans backing Fannie Mae MBS, excluding re-securitized private label mortgage related
securities backed by subprime mortgage loans, represented approximately 0.3% of our
single-family mortgage credit book of business as of December 31, 2007, compared with
42
0.2% and 0.1% as of December 31, 2006 and 2005, respectively. [emphasis supplied]
Th ese statements could have lulled market participants and others—including
37 Offi ce of Comptroller of the Currency, Federal Reserve, Federal Deposit Insurance Corporation,
and Offi ce of Th rift Supervision advised in its “Expanded Guidance for Subprime Lending Programs”,
published in 2001, http://www.federalreserve.gov/Boarddocs/SRletters/2001/sr0104a1.pdf that “the term
‘subprime’ refers to the credit characteristics of individual borrowers. Subprime borrowers typically have
weakened credit histories that include payment delinquencies and possibly more severe problems such
as charge-off s, judgments, and bankruptcies.” A FICO score of 660 or below was evidence of “relatively
high default probability.”
38 Derived from Table 12.
39 Fannie Mae, 2005 10-K report, fi led May 2, 2007.
40 Fannie Mae, 2007 Form 10K, pp. 129 and 155.
41 Fannie Mae, 2007 Form 10K, p.129.
42 Fannie Mae, 2007 Form 10K, p.130.