Page 543 - untitled

514 Dissenting Statement

Table 11. Fannie Mae Took Losses on Higher Risk Mortgages
127
Necessary to Meet the Aff ordable Housing Goals
Individual Enhancements 30 YR FRM
(cost analysis for “base” MCM Model Fee Average Gap
enhancement-not layered) Default %
Base: 100% LTV, 20% MI 106 34 -68.50
Interest First (IF) 129 40 -91.50
Seller Contribution (SC) 115 23 -77.50
Temporary B/D (BD) 118 37 -80.50
Zero Down (ZD) 106 34 -68.50
Manufactured Housing (MH) 227 42 -189.50
From this report, it is clear that in order to meet the AH goals Fannie had to
pay up for goals-rich mortgages, taking a huge credit risk along the way.
Th e dismal fi nancial results that were developing at Fannie as a result of the
AH goals were also described in Fannie’s 10-K report for 2006, which anticipated
both losses of revenue and higher credit losses as a result of acquiring the mortgages
required by the AH goals:
[W]e have made, and continue to make, signifi cant adjustments to our mortgage
loan sourcing and purchase strategies in an eff ort to meet HUD’s increased housing
goals and new subgoals. Th ese strategies include entering into some purchase and
securitization transactions with lower expected economic returns than our typical
transactions. We have also relaxed some of our underwriting criteria to obtain goals-
qualifying mortgage loans and increased our investments in higher-risk mortgage
loan products that are more likely to serve the borrowers targeted by HUD’s goals and
subgoals, which could increase our credit losses. [emphasis supplied] 128
Th e underlying reasons for the “lower expected returns” were reported in
February 2007 in a document the FCIC received from Fannie, which noted that
for 2006 the “cash fl ow cost” of meeting the housing goals was $140 million while
the “opportunity cost” was $470 million. In a report to HUD on the AH goals,
129
dated April 11, 2007, Fannie described these costs as follows: “Th e largest costs [of
meeting the goals] are opportunity costs of foregone revenue. In 2006, opportunity
cost was about $400 million, whereas the cash fl ow cost was about $134 million. If
opportunity cost was $0, our shareholders would be indiff erent to the deal. Th e cash
fl ow cost is the implied out of pocket cost.” 130
By this time, “Alignment Meetings”—in which Fannie staff considered how
they would meet the AH goals—were taking place almost monthly (according
to the frequency with which presentations to Alignment meetings occur in the
documentary record). In an Alignment Meeting on June 22, 2007, on a “Housing
Goals Forecast,” three plans were considered for meeting the 2007 AH goals, even
127 Id., p.8.
128 Fannie Mae, 2006 10-K, p.146.
129 Fannie Mae, “Business Update,” presentation. “Cash fl ow cost” equals expected revenue minus
expected loss. Expected revenue is what will be received in G-fees; expected loss includes G&A and
credit losses. “Opportunity cost” is the G-fee actually charged minus the model fee—the fee that Fannie’s
model would impose to guarantee a mortgage of the same quality in order to earn a fair market return
on capital.
130 Fannie Mae, “Housing Goals Briefi ng for HUD,” April 11, 2007.