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S&Ls’ holding loans in portfolio] is due in part to below-market CRA products.”
In other words, banks and S&Ls subject to CRA were making mortgage loans at
below market interest rates, and thus could not sell them without taking losses.
Th is was troubling for Fannie because it meant that in order to capture these loans
they would have to increase what they were willing to pay for these loans. Doing so
would underprice the risks they would be assuming.
It is important to recognize what was happening. Fannie, and the banks and
S&Ls under CRA, were now competing for the same kinds of NTMs, and were
doing so by lowering their mortgage underwriting standards and adding fl exibilities
and subsidies. Simply as a result of supply and demand, all of the participants in
this competition were required to pay higher prices for these increasingly risky
mortgages. Th e banks and S&Ls that acquired these loans could not sell them,
without taking a loss, when market interest rates were higher than the rates on the
mortgages. Th is is the fi rst indication in the documents that the FCIC received
from Fannie that competition for subprime loans among the GSEs, banks, S&Ls,
and FHA was causing the underpricing of risk—one of the principal causes of the
mortgage meltdown and thus the fi nancial crisis.
In January 2003, Fannie began planning for how to confront HUD before the
next round of increases in the AH goals, expected to occur in 2004. In an “Action
Plan for the Housing Goals Rewrite,” dated January 22, 2003, Fannie staff reviewed
a number of options, and concluded that “Fannie should strongly oppose: goals
increases and new subgoals.” (Slide 35) 118
In March 2003, as Fannie prepared for new increases in the AH goals, its
staff prepared a presentation, perhaps for HUD or for policy defense in public
forums. Th e apparent purpose was to show that the goals should not be increased
signifi cantly in 2004. Slide 5 stated:
In 2002, Fannie Mae exceeded all our goals for the 9th straight year. But it was probably
the most challenging environment we’ve ever faced. Meeting the goals required heroic
th
4 quarter eff orts on the part of many across the company. Vacations were cancelled.
Th e midnight oil burned. Moreover, the challenge freaked out the business side of
the house. Especially because the tenseness around meeting the goals meant that we
considered not doing deals—not fulfi lling our liquidity function—and did deals at
119
risks and prices we would not have otherwise done. [emphasis supplied]
By September 2004, it was becoming clear that continuing increases in
the AH goals were having a major adverse eff ect on Fannie’s profi tability. In a
memorandum to Brian Graham (another Fannie offi cial), Paul Weech, Director of
Market Research and Policy Development, wrote: “Meeting the goals in diffi cult
markets imposes signifi cant costs on the Company and potentially causes market-
distorting behaviors. In 1998, 2002, and 2003 especially, the Company has had
to pursue certain transactions as much for housing goals attainment as for the
economics of the transaction.” 120
In a June 2005 presentation entitled “Costs and Benefi ts of Mission

117 Barry Zigas, “Fannie Mae and Minority Lending: Assessment and Action Plan” Presentation,
November 16, 2000.
118 Fannie Mae, “Action Plan for the Housing Goals Rewrite,” January 22, 2003.
119 Fannie Mae, “Th e HUD Housing Goals,” March 2003.
120 Fannie Mae internal memo, Paul Weech to Brian Graham, “RE: Mission Legislation,” September 3, 2004.