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506 Dissenting Statement

or fi nancial capacity to do so. In the end, Fannie was unable to take any signifi cant
action during the key years 2005 and 2006 that would regain market share from
the subprime lenders or anyone else. Th ey reduced their underwriting standards
to the degree necessary to keep pace with the increasing AH goals, but not to go
signifi cantly beyond those requirements.
In a key memo dated June 27, 2005 (the “Crossroads” memo), Tom Lund,
Executive Vice President for Single Family Business, addressed the question of
Fannie’s loss of market share and how this share position could be regained. Th e date
of this memo is important. It shows that even in the middle of 2005 there was still
a debate going on within Fannie about whether to compete for market share with
Countrywide and the other subprime issuers. No such competition had actually
begun. Lund starts the discussion in the memo by saying “We are at a strategic
crossroad…[his ellipses] We face two stark choices: 1. Stay the Course [or] 2. Meet
the Market Where the Market Is”. “Staying the course” meant trying to maintain
the mortgage quality standards that Fannie had generally followed up to that
point (except as necessary to meet HUD’s AH goals). “Meeting the market” meant
competing with Countrywide and others not only by acquiring substantially more
NTMs than the AH goals required, but also by acquiring much riskier mortgages
than Fannie—which specialized in fi xed rate mortgages—had been buying up to
that time.
Th ese riskier potential acquisitions would have included much larger
numbers of Option ARMs (involving negative amortization) and other loans
involving multiple (or “layered”) risks with which Fannie had no prior experience.
Th us, Lund noted that to compete in this business Fannie lacked “capabilities
and infrastructure…knowledge… willingness to compete on price..[and] a value
proposition for subprime.” His conclusion was as stark as the choice: “Realistically,
we are not in a position to ‘Meet the Market’ today.” “Th erefore,” Lund continued,
“we recommend that we: Pursue a ‘Stay the Course’ strategy and test whether market
108
changes are cyclical vs secular.” [emphasis supplied]
In the balance of the Crossroads memo, Lund notes that subprime and Alt-A
loans are driving the “leakage” of “goals rich” products to PMBS issuers. He points
out the severity of the loss of market share, but never suggests that this changes
his view that Fannie was unequipped to compete with Countrywide and others at
that time. According to an internal FCIC staff investigation, dated March 31, 2010,
other senior offi cials—Robert Levin (Executive Vice President and Chief Business
Offi cer), Kenneth Bacon (Executive Vice President for Housing and Community
Development), and Pamela Johnson (Senior Vice President for Single Family
Business)—all concurred that Fannie should follow Lund’s recommendation to
“stay the course.”
Th ere is no indication in any of Fannie’s documents aft er June 2005 that
Lund’s “Stay the Course” recommendation was ever changed or challenged during
2005 or 2006—the period when Fannie and Freddie were supposed to have begun to
acquire large numbers of NTMs (beyond what was required to meet the AH goals)
in order to compete with Countrywide or (in some telling) Wall Street.
Th us, in June 2006, one year aft er the Lund Crossroads memo, Stephen B.
Ashley, then the chairman of the board, told Fannie’s senior executives: “2006 is a

108 Tom Lund, “Single Family Guarantee Business: Facing Strategic Crossroads” June 27, 2005.