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Peter J. Wallison 497

2000, just aft er HUD announced the latest increase in the AH goals for the GSEs:
Your CRA business is very important to us. Since 1997, we have done nearly $7 billion
in specially targeted CRA business—all with depositories like yours. But that is just
the beginning. Before the decade is over, Fannie Mae is committed to fi nance over
$20 billion in specially targeted CRA business and over $500 billion in CRA business
altogether…
We want your CRA loans because they help us meet our housing goals… We will buy
them from your portfolios, or package them into securities… We will also purchase
CRA mortgages you make right at the point of origination... You can originate CRA
loans for our purchase with one of our CRA-friendly products, like our 3 percent
down Fannie 97. Or we have special community lending products with fl exible
underwriting and special fi nancing… Our approach is “CRA your way”. 91
Th e 50 percent level in the new HUD regulations was a turning point. Fannie
and Freddie had to stretch a bit to reach the previous goal of 42 percent, but 50
percent was a signifi cant challenge. As Dan Mudd told the Commission,
Fannie Mae’s mission regulator, HUD, imposed ever-higher housing goals that
were very diffi cult to meet during my tenure as CEO [2005-2008]. Th e HUD goals
greatly impacted Fannie Mae’s business, as a great deal of time, resources, energy,
and personnel were dedicated to fi nding ways to meet these goals. HUD increased
the goals aggressively over time to the point where they exceeded the 50% mark,
requiring Fannie Mae to place greater emphasis on purchasing loans to underserved
areas. Fannie Mae had to devote a great deal of resources to running its business to
satisfy HUD’s goals and subgoals. 92
Mudd’s point can be illustrated with simple arithmetic. At the 50 percent level,
for every mortgage acquired that was not goal-qualifying, Fannie and Freddie had
to acquire a goal-qualifying loan. Although about 30 percent of prime loans were
likely to be goal-qualifying in any event (because they were made to borrowers at or
below the applicable AMI), most prime loans were not. Subprime and other NTM
loans were goals-rich, but not every such loan was goal-qualifying. Accordingly, in
order to meet a 50 percent goal, the GSEs had to purchase ever larger amounts of
goals-rich NTMs in order to acquire suffi cient quantities of goals-qualifying loans.
Th us, in a presentation to HUD in 2004, Fannie argued that to meet a 57
percent LMI goal (which was under consideration by HUD at the time) it would
have to acquire 151.5 percent more subprime loans than the goal in order to capture
93
enough goal-qualifying loans. Moreover, with the special aff ordable category at
20 percent in 2004, the GSEs had to acquire large numbers of NTM loans from
borrowers who were at or below 60 percent of the AMI. Th is requirement drove
Fannie and Freddie even further into risk territory in search of loans that would
meet this subgoal.

91 Jamie S. Gorelick, Remarks at American Bankers Association conference, October 30, 2000. http://
web.archive.org/web/20011120061407/www.fanniemae.com/news/speeches/speech_152.html.
92 Daniel H. Mudd’s Responses to the Questions Presented in the FCIC’s June 3, 2010, letter, Answer
to Question 6: How infl uential were HUD’s aff ordable housing guidelines in Fannie Mae’s purchase of
subprime and Alt-A loans? Were Alt-A loans “goals-rich”? Were Alt-A loans net positive for housing
goals?
93 Fannie Mae, “Discussion of HUD’s Proposed Housing Goals,” Presentation to the Department of
Housing and Urban development, June 9, 2004.