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though half the year was already gone. One of the plans was forecast to result in
opportunity costs of $767.7 million, while the other two plans resulted in opportunity
131
costs of $817.1 million. In a Forecast meeting on July 27, 2007, a “Plan to Meet
Base Goals,” which probably meant the topline LMI goal including all subgoals, was
placed at $1.156 billion for 2007. 132
Finally, in a December 21, 2007, letter to Brian Montgomery, Assistant
Secretary of Housing, Fannie CEO Daniel Mudd asked that, in light of the fi nancial
and economic conditions then prevailing in the country—particularly the absence of
a PMBS market and the increasing number of mortgage delinquencies and defaults—
HUD’s AH goals for 2007 be declared “infeasible.” He noted that HUD also has an
obligation to “consider the fi nancial condition of the enterprise when determining
the feasibility of goals.” Th en he continued: “Fannie Mae submits that the company
took all reasonable actions to meet the subgoals that were both fi nancially prudent
and likely to contribute to the achievement of the subgoals….In 2006, Fannie Mae
relaxed certain underwriting standards and purchased some higher risk mortgage loan
products in an eff ort to meet the housing goals. Th e company continued to purchase
higher risk loans into 2007, and believes these eff orts to acquire goals-rich loans are
133
partially responsible for increasing credit losses.” [emphasis supplied]
Th is statement confi rms two facts that are critical on the question of why
Fannie (and Freddie) acquired so many high risk loans in 2006 and earlier years:
fi rst, the companies were trying to meet the AH goals established by HUD and not
because these loans were profi table. It also shows that the eff orts of HUD and others—
including the Commission majority in its report—to blame the managements
of Fannie and Freddie for purchasing the loans that ultimately dragged them to
insolvency is misplaced.
Finally, in a July 2009 report, the Federal Housing Finance Agency (FHFA,
the GSEs’ new regulator, replacing OFHEO), noted that Fannie and Freddie both
followed the practice of cross-subsidizing the subprime and Alt-A loans that they
acquired:
Although Fannie Mae and Freddie Mac consider model-derived estimates of cost
in determining the single-family guarantee fees they charge, their pricing oft en
subsidizes their guarantees on some mortgages using higher returns they expect to
earn on guarantees of other loans. In both 2007 and 2008, cross-subsidization in
single-family guarantee fees charged by the Enterprises was evident across product
types, credit score categories, and LTV ratio categories. In each case, there were cross-
subsidies from mortgages that posed lower credit risk on average to loans that posed
higher credit risk. Th e greatest estimated subsidies generally went to the highest-risk
mortgages. 134
Th e higher risk mortgages were the ones most needed by Fannie and Freddie
to meet the AH goals. Needless to say, there is no need to cross-subsidize the G-fees
of loans that are acquired because they are profi table.
Accordingly, both market share and profi tability must be excluded as reasons
that Fannie (and Freddie) acquired subprime and Alt-A loans between 2004 and

131 Fannie Mae, “Housing Goals Forecast,” Alignment Meeting, June 22, 2007.
132 Fannie Mae, Forecast Meeting, July 27, 2007 slide 4.
133 Fannie Mae letter, Daniel Mudd to Asst. Secretary Brian Montgomery, December 21, 2007, p.6.
134 FHFA, Fannie Mae and Freddie Mac Single Family Guarantee Fees in 2007 and 2008, p.33.