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124
of predatory lending, with this product is great.” But the product was approved
by Freddie, probably for the reason stated by another Freddie employee: “Th e Alt-A
[(low doc/no doc)] business makes a contribution to our HUD goals.” 125
On May 5, 2006, a Fannie staff memo to the Single Family Business Credit
Committee revealed the serious credit and fi nancial problems Fannie was facing
when acquiring subprime mortgages to meet the AH goals. Th e memo describes
the competitive landscape, in which “product enhancements from Freddie Mac,
FHA, Alt-A and subprime lenders have all contributed to increased competition
for goals rich loans…On the issue of seller contributions [in which the seller of the
home pays cash expenses for the buyer] even FHA has expanded their guidelines
by allowing 6% contributions for LTVs up to 97% that can be used toward closing,
prepaid expenses, discount points and other fi nancing concessions.” 126
Th e memorandum is eye-opening for what it says about the credit risks
Fannie had to take in order to get the goals-rich loans it needed to meet HUD’s
AH requirements for 2006. Table 11 below shows the costs of NTMs in terms of the
guarantee fee (G-fee) “gap.” (In order to determine whether a loan contributed to a
return on equity, Fannie used a G-fee pricing model that took into account credit
risk as well as a number of other factors; a G-fee “gap” was the diff erence between
the G-fees required by the pricing model for a particular loan to contribute to a
return on equity and a loan that did not.) Th e table in this memo shows the results
for three subprime products under consideration, a 30 year fi xed rate mortgage
(FRM), a 5 year ARM, and 35 and 40 year fi xed rate mortgages. For simplicity, this
analysis will discuss only the 30 year fi xed rate product. Th e table shows that the base
product, the 30 year FRM, with a zero downpayment should be priced according to
the model at a G-fee of 106 basis points. However, the memo reports that Fannie is
actually buying loans like that at a price consistent with an annual fee of 37.50 basis
points, producing a gap (or loss from the model) of 68.50 basis points. Th e reason
the gap is so large is shown in the table: the anticipated default rate on that zero-
down mortgage was 34 percent. Th e table then goes on to look at other possible loan
alternatives, with the following results:

124 Freddie Mac, internal email, Donna Cogswell on behalf of David Andrukonis to Dick Syron, “RE: No
Income/No Asset (NINA) Mortgages,” September 7, 2004.
125 Freddie Mac, internal email from Mike May to Dick Syron, “FW: FINAL NINA Memo,” October 6, 2004.
126 Fannie Mae, internal memo, Single Family Business Product Management and Development to Single
Family Business Credit Committee, “RE: PMD Proposal for Increasing Housing Goal Loans,” May 5,
2006, p.6.