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498 Dissenting Statement

Most of what was going on here was under the radar, even for specialists in
94
the housing fi nance fi eld, but not everyone missed it. In a paper published in 2001,
fi nancial analyst Josh Rosner recognized the deterioration in mortgage standards
although he did not recognize how many loans were subject to this problem:
Over the past decade Fannie Mae and Freddie Mac have reduced required down
payments on loans that they purchase in the secondary market. Th ose requirements
have declined from 10% to 5% to 3% and in the past few months Fannie Mae
announced that it would follow Freddie Mac’s recent move into the 0% down payment
mortgage market. Although they are buying low down payment loans, those loans
must be insured with ‘private mortgage insurance’ (PMI). On homes with PMI, even
the closing costs can now be borrowed through unsecured loans, gift s or subsidies.
Th is means that not only can the buyer put zero dollars down to purchase a new house
but also that the mortgage can fi nance the closing costs….
[I]t appears a large portion of the housing sector’s growth in the 1990’s came from
the easing of the credit underwriting process….Th e virtuous cycle of increasing
homeownership due to greater leverage has the potential to become a vicious cycle
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of lower home prices due to an accelerating rate of foreclosures. [emphasis supplied]
Th e last increase in the AH goals occurred in 2004, when HUD raised the
LMI goal to 52 percent for 2005, 53 percent for 2006, 55 percent for 2007 and 56
percent for 2008. Again, the percentage increases in the special aff ordable category
outstripped the general LMI goal, putting added pressure on Fannie and Freddie
to acquire additional risky NTMs. Th is category increased from 20 percent to
27 percent over the period. In the release that accompanied the increases, HUD
declared:
Millions of Americans with less than perfect credit or who cannot meet some of
the tougher underwriting requirements of the prime market for reasons such as
inadequate income documentation, limited downpayment or cash reserves, or the
desire to take more cash out in a refi nancing than conventional loans allow, rely
on subprime lenders for access to mortgage fi nancing. If the GSEs reach deeper into
the subprime market, more borrowers will benefi t from the advantages that greater
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stability and standardization create. [emphasis supplied]
Fannie did indeed reach deeper into the subprime market, confi rming
in a March 2003 presentation to HUD, “Higher goals force us deeper into FHA
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and subprime.” According to HUD data, as a result of the AH goals Fannie Mae’s
acquisitions of goal-qualifying loans (which were primarily subprime and Alt-A)
increased (i) for very low income borrowers from 5.2 percent of their acquisitions in
1993 to 12.2 percent in 2007; (ii) for special aff ordable borrowers from 6.4 percent
in 1993 to 15.2 percent in 2007; and (iii) for less than median income borrowers
(which includes the other two categories) from 29.2 percent in 1993 to 41.5 percent
in 2007. 98

94 Josh Rosner, “Housing in the New Millennium: A Home Without Equity is Just a Rental With Debt,”
June, 2001, p.7, available at: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1162456.
95 Id., p.29.
96 http://fdsys.gpo.gov/fdsys/pkg/FR-2004-11-02/pdf/04-24101.pdf, p.63601.
97 Fannie Mae, “Th e HUD Housing Goals”, March 2003.
98 HUD, Offi ce of Policy Development and Research, Profi les of GSE Mortgage Purchases, 1992-2000,
2001-2004, and 2005-2007.