the [Financial Crisis Inquiry] commission, headed by Phil Angelides, a former Democratic candidate for governor of California, and Bill Thomas, a former Republican congressman from that state, never investigated what information about Fannie and Freddie’s loans was available at the time, or why investors and regulators continued to believe that mortgage-backed securities were safe.Read the complete opinion piece here.*** For many years, Fannie Mae defined subprime mortgages as loans that it bought from subprime lenders, not by credit score. This had the effect of making its investment holdings seem less risky. In its 2007 10-K annual report, for example, the company estimated its subprime exposure at about 0.3 percent of its single-family mortgages. Tables deeper inside the report showed loans with FICO credit scores of less than 660 were 18 percent of the company’s single-family holdings.
The significance of this for the financial crisis is that Fannie and Freddie’s reports might have lulled analysts and risk managers into believing that if the housing bubble collapsed, the damage would be limited because the number of risky loans was small.
We now know the damage was severe. Had those 12 million Fannie Mae and Freddie Mac loans been prime instead of subprime, delinquencies and defaults probably would have been around 2 percent, not almost nine times higher.
Peter J. Wallison was a member of the Financial Crisis Inquiry Commission.
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