Fannie and Freddie Loaded Up on $3.17 Trillion in Subprime and Alt-A Loans & Securities 2002-2007
By Robert Stowe England
MindOverMarket.blogspot.com
October 10, 2009
On Thursday, October 8, at a hearing before the Senate Finance Committee, Senator Robert Menendez (D-N.J.) asked Edward DeMarco, acting director of the Federal Housing Finance Agency, how much subprime was loaded onto the balance sheets of Fannie Mae and Freddie Mac.
DeMarco indicated that the Government-Sponsored Enterprises (GSEs) had taken on a lot of subprime mortgages and that he would get back to Senator Menendez with more details.
Meanwhile, Edward Pinto, the former chief credit officer of Fannie Mae and an industry consultant, helpfully put together the numbers that Senator Menendez sought and sent the data to the Senator. Further, he released the numbers publicly in a statement October 8 to his email list.
After receiving a copy of Ed Pinto's statement Thursday, I asked him if he also had the numbers for Alt-A mortgages. He then added those numbers to his statement and released the revised statement on Friday, October 9. The statement appears below.
I ran into Pinto October 9 at an American Enterprise Institute conference titled "No Way Out: Government Response to the Financial Crisis." I asked him about the Alt-A lending (this was before he released the Alt-A numbers).
Pinto explained that the category known as "Alt-A" originated in the mid-1980s while he was at Fannie Mae as the chief credit officer as an abbreviation for "Alternative Agency," which included loans that did not qualify for underwriting by Fannie Mae (and later Freddie Mac).
Pinto identied two types of Alt-A loans: those that were excluded because they didn't measure up to GSE standards and a second category of low and no documentation loans that emerged in the late 1980s.
In the industry, Alt-A has also come to be known as loans that were alternative prime credits, sometimes called A-credit rated loans. These loans typically had higher FICO scores than subprime and had low or no documentation, including stated income loans.
Alt-A mortgages have come in a host of exotic nontraditional loans that proliferated in this decade, including Option ARMs, Interest Only loans, No Income No Asset (NINAs) loans and No Income No Assets No Job (NINJAs) loans.
Further, high loan-to-value or LTV loans (95 percent and higher) and loans with expanded underwriting criteria such as higher debt-to-income ratios, lower reserves, silent seconds, etc., while not classified as self-denominated Alt-A under the definitions used by the GSEs, have features similar to Alt-A loans.
Pinto said that the average FICO score for Alt-A in recent years was in the high 600s in the first few years of the decade. From late 2002 through 2006, Alt-A FICOs had moved up to 710-720, he explained.
Fannie and Freddie hid the level of both subprime and Alt-A loans they took onto their balance sheets from public view by inititally refusing to classify them as subprime and Alt-A.
The strategy of the GSE's with regard to both subprime and Alt-A, Pinto asserted, was "to take a dominant share in those markets they entered."
Fannie and Freddie viewed the private label mortgage-backed securities market as a competitive "threat" to their dominance of the mortgage market; and, they wanted to counteract that threat and reassert their dominance, Pinto explains. In the process, lending standards were compromised.
Pinto points out in his statement below that the GSE's were deeply involved in these markets before the dramatic expansion of the private label mortgage-backed securities market that began in 2004.
This activity then explains why the two GSE's suddenly collapsed in September 2008, shocking the markets with their heavy losses, and requiring the government to take them over and bail them out.
Last year Fannie and Freddie began to publish notes in their filings with the SEC that reported that some of the loans identified within their portfolio as prime might be classified as subprime or Alt-A by others, Pinto says.
Fannie added its "classification" warning statement in its its 10-Q filing with the Securities and Exchange Commission for the third quarter of 2008.
In its 2008 10-K, Freddie added a statement that there is "no universally accepted definition" of Alt-A.
Indeed, Freddie's first publicly-filed 10-Q for the second quarter of 2008 contained a statment that "[i]n determining our Alt-A exposure in loans underlying our single-family mortgage portfolio, we have classified mortgage loans as Alt-A if the lender that delivers them to us has classified the loans as Alt-A, or if the loans had reduced documentation requirements, which indicate that the loan should be classified as Alt-A."
Here, then, is Edward Pinto's statement, as it was revised Friday, October 9, to include Alt-A data, along with the subprime data released the prior day.
Copyright © 2009 Robert Stowe England. All Rights Reserved.
STATEMENT
Answer to the Question Senator Menendez’ Asked at Yesterday’s Senate Banking Committee Hearing on Fannie and Freddie
For Immediate Release: October 9, 2009
By Edward Pinto, consultant to mortgage-finance industry, expert on the causes of the mortgage crisis, former chief credit officer at Fannie Mae in the 1980s, and 10 years experience in affordable lending prior to 1984,
At Thursday’s Senate Banking Committee hearing on the future of Fannie and Freddie (the GSEs), Senator Menendez asked Edward DeMarco, the acting director of the Federal Housing Finance Agency what role the GSEs played in the housing crisis. Mr. Demarco responded that both had significant and active roles in the subprime private mortgage backed securities (PMBS) market. He added that with respect to the purchase of whole loans, both GSEs purchased substantial volumes of loans with subprime characteristics, even though neither classified them as subprime at the time . Mr. DeMarco indicated that he would need time to get back to Sen. Menendez with a detailed answer to his question.
Here are the results of my research regarding the Senator’s question.
Table 1 setting forth the GSEs’ subprime loan and securities purchases (regardless of their initial classification):
Product Categories
Subprime PMBS (net of GSE purchases) (PMBS = Private Label ortgage-Backed Securites):
2002 $85 billion
2003 $113 billion
2004 $183 billion
2005 $296 billion
2006 $339 billion
2007 $140 billion
Total $1.16 trillion
GSE purchases of subprime PMBS:
2002 $38 billion
2003 $82 billion
2004 $180 billion
2005 $169 billion
2006 $110 billion
2007 $62 billion
Total $641 billion
GSE purchases of subprime loans not initially classified as subprime:
2002 $206 billion
2003 $262 billion
2004 $144 billion
2005 $139 billion
2006 $138 billion
2007 $195 billion
Total $1.084 trillion
GSE subprime volume/PMBS volume (net of GSE subprime PMBS purchases):
2002 $244 b./ $85 b. = 2.9 times
2003 $344 b./ $113 b. = 3.0 times
2004 $324 b./ $183 b. = 1.8 times
2005 $308 b./ $296 b. = 1 times
2006 $248 b./ $339 b. = 0.7 times
2007 $257 b./ $140 b. = 1.8 times
Total $1.73 trillion/ $1.16 trillion =1.5 times
Sources: Inside Mortgage Finance, FHFA, Fannie Mae, Freddie Mac, and Edward Pinto
The above analysis makes it clear that the GSEs’ subprime acquisitions exceeded subprime PMBS issuances and that their dominance predates the dramatic rise of the subprime PMBS market in 2004.
I was able to trace the GSEs’ purchases of subprime loans and securities as far back as 1997. They purchased $66 billion in subprime PMBS during the period 1997-2001. They also purchased $419 billion of subprime loans not initially classified as subprime during the same period 1997-2001.
The GSEs’ subprime purchases totaled $2.2 trillion over the 1997-2007 period.
In addition, my research has determined the extent of the GSEs’ purchases of Alt-A loans and securities. Alt-A means “alternative to
agency guidelines”. As in the case with subprime loans, the GSEs’ used a narrow definition with which to classify loans as Alt-A.
Table 2 setting forth the GSEs’ Alt-A loan and securities purchases (regardless of their initial classification):
Product Categories
Alt-A PMBS (net of GSE purchases)
2002 $35 billion
2003 $62 billion
2004 $129 billion
2005 $296 billion
2006 $323 billion
2007 $235 billion
Total $1.08 trillion
GSE purchases of Alt-A PMBS
2002 $18 billion
2003 $12 billion
2004 $30 billion
2005 $36 billion
2006 $43 billion
2007 $15 billion
Total $154 billion
GSE purchases of Alt-A loans initially classified as Alt-A
2002 $66 billion
2003 $77 billion
2004 $64 billion
2005 $77 billion
2006 $157 billion
2007 $178 billion
Total $619 billion
GSE purchases of Alt-A loans not initially classified as
Alt-A
2002 $106 billion
2003 $134 billion
2004 $88 billion
2005 $77 billion
2006 $82 billion
2007 $184 billion
Total $671 billion
GSE Alt-A volume/PMBS volume (net of GSE Alt-A PMBS purchases)
2002 $190 b./ $35 b. = 5.4 times
2003 $223 b./ $62 b. = 3.6 times
2004 $182 b./ $129 b. = 1.4 times
2005 $190 b./ $296 b. = 0.6 times
2006 $282 b./ $323 b. = 0.9 times
2007 $377b./ $235 b. = 1.6 times
Total $1.44 trillion/ $1.08 trillion =1.3 times
Sources: Inside Mortgage Finance, FHFA, Fannie Mae, Freddie Mac, and Edward Pinto
The above analysis makes it clear that the GSEs’ overall Alt-A acquisitions exceeded Alt-A PMBS issuances and that their dominance predates the dramatic rise of the Alt-A PMBS market in 2004. Also of note is the fact that the GSEs’ average Alt-A loan size was about $155,000, while the average loans size in a Alt-A PMBS was $300,000, thus just about doubling the impact of the GSEs’ Alt-A acquisitions.
I was able to trace the GSEs’ purchases of Alt-A loans and securities only as far back as 2002 for loans classified as Alt-A and back to 1992 for Alt-A loans not initially classified as Alt-A (loans with an LTV of <=5%). They purchased $529 billion of Alt-A loans not initially classified as Alt-A loans over the period 1997-2001. The GSEs’ Alt-A purchases totaled $2.0 trillion over the 1997-2007 period.
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