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this reason, Fannie developed special categories of loans in which the fi rm waived
some of its regular underwriting requirements in order to supplement what they
were getting from higher quality NTMs. Th e two principal categories were My
Community Mortgage (MCM) and Expanded Approval (EA). In many cases, these
two categories enabled Fannie to meet the AH goals, but at the cost of much higher
delinquency rates than occurred among higher quality NTMs they acquired. As
the years progressed and the AH goals increased, Fannie had to acquire increasing
numbers of loans in these categories, and as shown in Table 6 these increasing
numbers also exhibited increasing delinquency rates:
Table 6. Higher Risk Loans Produced Higher Delinquency Rates at Fannie Mae
101
Goals by Vintage Loan Count Serious Delinquency Rate
2004 & Prior EA/MCM & Housing Goals 115,686 17.59%
2005 EA/MCM & Housing Goals 56,822 22.35%
2006 EA/MCM & Housing Goals 110,539 25.19%
2007 EA/MCM & Housing Goals 224, 513 29.70%
Just how desperate Fannie and Freddie were to meet their AH goals is revealed
by Fannie’s behavior in 2004. As reported in the American Banker on May 13, 2005,
“A House Financial Services Committee report shared with lawmakers Th ursday
accused Fannie Mae and Freddie Mac of engaging over several years in a series
of dubious transactions to meet their aff ordable-housing goals…Th e report cited
several large transactions entered into by Fannie under which sellers were allowed
to repurchase loans without recourse. For example, it said that in September 2003,
Fannie bought the option to buy up to $12 billion of multifamily mortgage loans
from Washington Mutual, Inc., for a fee of $2 million, the report said. Under the
agreement, the GSE permitted WaMu to repurchase the loans…’ Th is was the largest
multifamily transaction ever undertaken by Fannie Mae and was critical for Fannie
Mae to reach the aff ordable-housing goals, the report said.” 102
A clearer statement of what happened here is contained in WaMu’s 10-K for
2003. Freddie had engaged in a similar but larger transaction with WaMu in 2003,
reported as follows in WaMu’s 10-K dated December 31, 2003:
Other noninterest income increased in 2003 compared with 2002 partially due to
fees paid to the Company [WaMu] by the Federal Home Loan Mortgage Corporation
(“FHLMC” or Freddie Mac”). Th e Company received $100 million in nonrefundable
fees to induce the Company to swap approximately $6 billion of multi-family loans
for 100% of the benefi cial interest in those loans in the form of mortgage-backed
securities issued by Freddie Mac. Since the Company has the unilateral right to
collapse the securities aft er one year, the Company has eff ectively retained control
over the loans. Accordingly, the assets continue to be accounted for and reported as
loans. Th is transaction was undertaken by Freddie Mac in order to facilitate fulfi lling
its 2003 aff ordable housing goals as set by the Department of Housing and Urban
Development.
Fannie and Freddie were both paying holders of mortgages to temporarily
transfer to them possession of goal-qualifying loans that the GSEs could use to
satisfy the AH goals for the year 2003. Aft er the end of the year, the seller had an
101 Fannie Mae, “GSE Credit Losses,” presentation to House Financial Services Committee, April 16, 2010.
102 Rob Blackwell, “Two GSEs Cut Corners to Hit Goals, Report Says,” American Banker, May 13, 2005, p.1.