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percent of the $508 billion issued that year. In 2006, Lehman had dropped out
of the top fi ve and Countrywide had taken over the leadership among the issuers,
but Wall Street’s share had not signifi cantly changed. By the middle of 2007, the
PMBS market had declined to such a degree that the market share numbers were
meaningless. However, in that year the GSEs’ market share in NTMs increased
because they had to continue buying NTMs—even though others had defaulted or
left the business—in order to comply with the AH goals. Accordingly, if Fannie had
ever loosened its lending standards to compete with some group, that group was
not Wall Street.
Th e next question is whether the GSEs loosened their underwriting standards
to compete with Countrywide, Ameriquest and the other subprime lenders who
were the dominant players in the PMBS market between 2004 and 2007. Again, the
answer seems clearly to be no. Th e subprime PMBS market was very small until
2002, when for the fi rst time it exceeded $100 billion and reached $134 billion in
107
subprime PMBS issuances. Yet, Table 7 shows that in 2002 alone the GSEs bought
$206 billion in subprime loans, more than the total amount securitized by all the
subprime lenders and others combined in that year.
Th e discussion of internal documents that follows will focus almost exclusively
on Fannie Mae. Th e Commission concentrated its investigation on Fannie and it
was from Fannie that the Commission received the most complete set of internal
documents.
By the early 2000s, Countrywide had succeeded in creating an integrated
system of mortgage distribution that included originating, packaging, issuing and
underwriting NTMs through PMBS. Other subprime lenders, as noted above, were
also major issuers, but they sold their PMBS through Wall Street fi rms that were
functioning as underwriters.
Th e success of Countrywide and other subprime lenders as distributors of
NTMs through PMBS was troubling to Fannie for two reasons. First, Countrywide
had been Fannie’s largest supplier of subprime mortgages; the fact that it could now
securitize mortgages it formerly sold to Fannie meant that Fannie would have more
diffi culty fi nding subprime mortgages that were AH goals-eligible. In addition, the
GSEs knew that their support in Congress depended heavily on meeting the AH
goals and “leading the market” in lending to low income borrowers. In 2005 and
2006, the Bush administration and a growing number of Republicans in Congress
were calling for tighter regulation of Fannie and Freddie, and the GSEs needed
allies in Congress to hold this off . Th e fact that subprime lenders were taking an
increasing market share in these years—suggesting that the GSEs were no longer the
most important sources of low income mortgage credit—was thus a matter of great
concern to Fannie’s management. Without strong support among the Democrats in
Congress, there was a signifi cant chance that the Republican Congress would enact
tougher regulatory legislation. Th is was expressed at Fannie as concern about a loss
of “relevance,” and provoked wide-ranging consideration within the fi rm about how
they could regain their leadership role in low-income lending.
Nevertheless, although Fannie had strong reasons for wanting to compete for
market share with Countrywide and others, it did not have either the operational
106 Inside Mortgage Finance, Th e 2009 Mortgage Market Statistical Annual—Volume II, pp. 139 and 140.
107 Inside Mortgage Finance, Th e 2009 Market Statistical Annual—Volume II, p.143.