Extent of Damage To Come

I finally got around to watching the little publicized Congressional hearing into Fannie/Freddy that was held a few weeks ago.

The following data is from Edward Pinto's testimony. He was chief credit officer of Fannie Mae from 1987 until 1989.

You could watch it here

www.c-spanarchives.org...

(The audio is muted for the first 30 secs or so).

Anyway here is some info you may have never heard yet from his testimony transcript:

there are a total of 25 million subprime and Alt-A loans outstanding in the United States

an unpaid principal balance of $4.5 trillion.

These 25 million default- prone loans constitute 44 percent of all mortgage loans by count in the United States

This is the largest percentage that has ever happened in our history

they are currently defaulting at unprecedented rates

They loosened credit standards for mortgages, which encouraged and extended the housing bubble

Fannie Mae/Freddy Mac trapped millions of people into loans they knew were unsustainable. And they destroyed the equity savings of tens of millions of homeowners spread throughout every congressional district in the United States.

permitted to operate at a 75-to-1 leverage ratio that makes Lehman Brothers look like they were operating conservatively

Fannie Mae and Freddie Mac may deny it, there could be no doubt that they now own or guarantee $1.6 trillion in subprime, Alt-A and other default-prone loans and securities

They were responsible for 34 percent of all the subprime loans made in the United States

59 percent of all the Alt-A loans made in the United States

These 10.5 million non-prime loans are experiencing a default rate that's eight times the level of their 20 million traditional quality loans

These 10.5 million loans include 5.7 million subprime, 3.3 million Alt-A, and 1.5 million loans with other high-risk characteristics

This 10.5 million total does not include FHA's obligations, which add another 3 million to the total and bring it to 13.5 million out of the 25 million subprime and other default-prone loans. That's more than half

I estimate that 1 million of the GSEs' Alt-A loans had no down payment.

If the default rates I predict actually occur, U.S. taxpayers will have to stand behind hundreds of billions of dollars of Fannie Mae and Freddie Mac losses

in the years 2005 to 2007, they bought over $1 trillion of these junk loans that are still on their books. Their purchases were a major factor in the development of the housing bubble and in the huge number of defaulted mortgages, which are now causing massive declines in house prices


In late 2004, Richard Syron and Frank Raines both went to the meetings of the originator community and made clear that they were going to wrest back the subprime and Alt-A mortgage market from Wall Street.

Syron said, "Our success in the future depends on our ability to serve emerging markets, and they've become the surging markets."

Raines also said, "We have to push products and opportunities to people who have lesser credit quality."


And this stimulated an orgy of junk mortgage development. Fannie and Freddie used their automated underwriting systems to divert subprime and Alt-A loans from private-label securitizers, driving up the value of these loans and making mortgage brokers even more eager to find borrowers, regardless of their credit standing.


Why did Fannie and Freddie do this? First, they were trying to meet HUD's affordable housing goals, which by 2005 required 55 percent of all their loans that they purchased be affordable housing loans, including 28 percent to low-income and very low-income borrowers. Second, after their accounting scandals of 2003-2004, they were afraid of new and stricter regulation. By ramping up their affordable housing lending -- that trillion dollars I mentioned earlier -- they showed their supporters in Congress that they could be a major source, on a continuing basis, of affordable housing financing.
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The United States Congress caused this whole thing