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Peter J. Wallison 507

transition year. To be sure, there are still issues to resolve. Th e consent order with
OFHEO [among other things, the order raised capital requirements temporarily] is
demanding. And from a strategy standpoint, it is clear that until we have eliminated
operations and control weaknesses, taking on more risk or opening new lines of
109
business will be viewed dimly by our regulators.” [emphasis supplied] So, again,
we have confi rmation that Fannie’s top offi cials did not believe that the fi rm was in
any position—in the middle of 2006—to take on the additional risk that would be
necessary s to compete with Countrywide and other subprime lenders that were
selling PMBS backed by subprime and other NTMs.
Moreover, there is very strong fi nancially-based evidence that Fannie
either never tried or was never fi nancially able to compete for market share with
Countrywide and other subprime lenders from 2004 to 2007. For example, set out
below are Fannie’s key fi nancial data, published by OFHEO, its former regulator, in
early 2008. 110

Table 8. Fannie Mae Financial Highlights
Earnings Performance: 2003 2004 2005 2006 2007
Net Income ($ billions) 8.1 5.0 6.3 4.2 -2.1
Net Interest Income ($ billions) 19.5 18.1 11.5 6.8 4.6
Guarantee Fees ($ billions) 3.4 3.8 4.0 4.3 5.1
Net Interest margin (%) 2.12 1.86 1.31 0.85 0.57
Average Guarantee Fee (bps) 21.9 21.8 22.3 22.2 23.7
Return on Common Equity (%) 27.6 16.6 19.5 11.3 -8.3
Dividend Payout Ratio (%) 20.8 42.1 17.2 32.4 N/M
Table 8 shows that Fannie’s average guarantee fee increased during the
period from 2003 to 2007. To understand the signifi cance of this, it is necessary
to understand the way the mortgage business works. Most of Fannie’s guarantee
business—the business that competed with securitizations of PMBS by Countrywide
and others—was done with wholesale sellers of mortgage pools. In these deals, the
wholesaler or issuer, a Countrywide or a Wells Fargo, would assemble a pool of
mortgages and look for a guaranty mechanism that would off er the best pricing. In
the case of a Fannie MBS, the key issue was the GSEs’ guarantee fee, because that
determined how much of the profi t the issuer would be able to retain. In the case of a
PMBS issue, it was the amount and cost of the credit enhancement needed to attain
a AAA rating for a large percentage of the securities backed by the mortgage pool.
Th e issuer had a choice of securitizing through Fannie, Freddie or one of
the Wall Street underwriters. Th us, if Fannie wanted to compete with the private
issuers for subprime and other loans there was only one way to do it—by reducing
its guarantee fees (called “G-fees” at Fannie and Freddie) and in this way making
itself a more attractive outlet than using a Wall Street underwriter. Th e fact that
Fannie does not appear to have done so is strong evidence that it never tried to
compete for share with Countrywide and the other subprime issuers aft er the date
of the Crossroads memo in June 2005.
Th e OFHEO fi nancial summary also shows that Fannie in reality had very

109 Stephen B. Ashley Fannie Mae Chairman, remarks at senior management meeting, June 27, 2006.
110 OFHEO, “Mortgage Markets and the Enterprises in 2007,” pp. 33-34.