fcic final report wallison financial crisis

8/3/2019 Fcic Final Report Wallison FINANCIAL CRISIS

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FINANCIAL CRI SIS

INQUIRY COMMISSION

DISSENI NG SAEMEN

PEER J. WALLISONARHUR F. BURNS

FELLOW IN FINANCIAL POLICY SUDIES

AMERICAN ENERPRISE INSIUE

JANAUARY 0



Cc: pw@.



443

INRODUCION

Why a Dissent?

T qu I hv b quy kd bu h Fc CIquy C (h “FCIC” h “C”) why C bhd uhz . Whu w h C’ h h cu h fc c, C pd d h Pd d h Ddd-Fk Ac (DFA), ch d hhy cqu uy . Cd h Pd cd whu k udd h u cu hwch v 2008, php w h pcp h Pd’ ch —“Nv d c w.” Ahuh h FCIC’ wk w h

u v whch h Ac pp w d, h vd uupup by cu h fc c d whh—wh dc —w c dw ccu h h d dd whwh cd h “f d hy.”

vd h x fc c, w u udd wh cud h whch w w wy , d k c vd h k h uu. I h dub h h p, cd h d h Cuy Rv Ac 1977 (CRA). L h h 111h C, up Dcc cb ducdHR 6334. T b, whch w udd by Hu Fc Svc CCh By Fk h “p py” h duck hC, wud hv xdd h CRA “U.S. bk fc cp,”d hu wud ppy, v h cy, h vc pcy d pb h dw d h fcc. Fuy, h b w cd up. Bcu h c c, uky h upp H.R. 6334 w hv h pw dp h x C, bu h uu h wk wh vw By Fk’ y k d qu. A h , h y buwk h v’ u pv c pcy pupw b u udd hw h pc w ccd h fcc 2008.

Lk C d h Ad, h C’ jy d u h kw h cu h fc c. Id puu huh udy, h C’ jy ud xv uy vvuhy k y h c h uppd up—h h

c w cud by “du” x u, d d ck W S, pdy d h k, uud dvvd fc y ddcd xcv k-k. T C dd uy v y h cu, d dd cvy cc h c



444 Dissenting Statement

vd h fc c. T jy’ p cv d y h cy b h fc c h h uh dd k, buy d hw hw pcc h hd y y uddy cud wd-wd fc c. I h d, h jy’ p ud u b ju y about h fc c, h h p wh caused hfc c.

What Caused the Financial Crisis?

G Sy qud h ph h “T wh cb h p cdd p .” Lk bck h fc c,w c why h udy hy cu d why vh y cuc. T wy y c h cud hvcud hc v; h d cu k dc whch, w pb cu, w h fc —h whu whch hy wudhv b d. U h dd, I bv h h sine qua non hfc c w U.S. v hu pcy, whch d h c 27 ubp d h ky —h h Ud S—whch w dy du h v 1997-2007 hu bubb b d. I h U.S. v hd ch h pcy ph— hwh bubb upcdd z d quy upcdd ub wk d hh k d —h fc c 2008 wudv hv ccud.

Id by C 1992 d pd by HUD bh h C dG W. Buh Ad, h U.S. v’ hu pcy uh c h whp h Ud S huh v duc udw dd. I puu h pcy, HUD ud () h

db hu qu pd by C 1992 h v-pd p (GSE) F M d Fdd Mc, () c v hpc h Fd Hu Ad (FHA), d () “B PccIv” ubp d d bk, cu ubpd h hh k d. HUD’ ky h wh ubp d hhh k d cvd d P III.

Uy, h , w ud bk cvd by h CRA,w cpd cp bw wh w bw h dc h whch hy vd. T cp cud udwdd dc, cd h ub wk d hh k bydwh h k wud pduc whu v uc, d cbudpy h wh h 1997-2007 hu bubb.

Wh h bubb b d d-2007, h w quy d hh

k dd by v pc d upcdd ub.T c h du w xcbd by h c h w y v—cud hu k y—udd h h F M dFdd Mc hd b cqu ub ubp d h hh k d HUD’ db hu .

Ad by h uxpcd dquc d du h b pp d-2007, v d h u- d k -bckd



445Peter J. Wallison

cu (MBS), dpp MBS vu—d pcy h MBS bckd by ubp d h ky — c h pc. Mk--k ccu h qud fc u w dw h vu h —duc h cp p d cu v d cdu. T ch by whch h du d dquc ubp dh hh k w d h fc y wh cvd d P II.

I h v, h v’ cu B S Mch 2008 py cd v bu cd fc hzd;v d h k pcp by bvd h cu B h fc u wud b cud hy cudfc d cu. Hwv, wh Lh Bh— v bk v h B—w wd , k pcp w hckd; uddy,hy w cd cd h fc hh h cup, y

whch ppd wkd by d h cp wdw qud by k--k ccu. T cud h d d hd ch— vuy upcdd pd k py d pc h w kw hfc c 2008.

Weren’t Tere Other Causes o the Financial Crisis?

My h cu h fc c hv b cd, cud h p h C’ jy, bu h ud bw h — cb—pvd pub xp h c.

Low interest rates and a fow o unds rom abroad . C h vu pc ph—uch w h y 2000 fc w bd—w pb h wh h hu bubb, d dquy

xp h h bubb h duc h ccud wh h bubb dd.T U.S. h hd hu bubb h p— cy h 1970 d 1980—bu wh h bubb dd hy dd cu fc c.Sy, h dvpd cu xpcd hu bubb h 2000, v h h U.S. bubb, bu wh h bubb dd h hu w . Oy h U.S. dd h d h c hububb cu fc dw d u fc c. T h h y h U.S. dd ubp d h ky cu h ud wh h bubb dd. I w’ h z h bubbh w h ky; w c. T 1997-2007 U.S. hu bubb w c by . Nvh, dd by v h hh yd d by ubp ud h wh k cu bckd by h. T w p h fc c, huh h ub

h k w cdby h h ub ddcy by v pcy. Whu h hu ub du h u U.S. hu pcy, du h h pv k wud hv cud fc c.

Deregulation or lax regulation. Exp h y ck u du cu h fc c dfc. F, fcdu fc u ccud h 30 y. T p




p h G-S Ac, quy cd xp du,hd h fc c.1 T p w ccphd huh hG-Lch-By Ac 1999, whch wd bk h f c h Nw D wh f d udw d cu.T vdc, hwv, h y bk ub bcu cu . T bk h ud bcu hy hd w quy MBS w d cv— d—wy pd by G-S; h v bk h ub—B S, Lh dM Lych—w d wh bk, huh hy hd bk h d pp hv pyd y d cud. Mv, h Fd Dp Iuc Cp Ipv Ac 1991 (FDICIA) uby increased h u bk d v d u (S&L) h S&L dbc h 1980 d y 1990, d why h FDICIA—h bk u c h dp

dp uc—d pv h fc c.Te shadow banking business. T v bk—B, Lh,M, Gd Sch d M Sy— cud d cuy hfc c, d h C jy’ p y uch h b h h d h Scu d Exch C (SEC) dquy upv h. I u h h SEC’ upvy pc w wk, bu y bk d S&L—y ud ud FDICIA— d. T c dub h c h v bk hd b ud k cc bk— hd b b ud dp k cc bk—hy wud hv cud fc d cu. T y h h bu d hv bk w qu d bk; w fc h-d bu wh h- b uch puch (cd p). T d h pcy vub h pc h ccud

2008, bu vdc h h xc v bk, h quy h u, w cause h fc c.

Failures o risk management . C h h w u k fc u xcv v k-k p wh h b cd “hdh v.” Wh hdh, y cd h d h hu bubb h udpc k h w k c. Hwv, h FCIC vwd hudd fcxp, cud c j bk, bk u d v.I c h y h—cud h dubb W Bu—wu cy cfd bu pd c h hy pu y bhdh jud. Hu b hv dcy bv h h w cu h dc hy , d d xp why h ub . B h c h u c d vu

pcyk, wh c pcc. T c h vuy pcp h fc y d h c— hy d vy h c—d u yh bu why h c ccud wh whud d pv h x .

1 S, .., P J. W, “Du d h Fc C: Ah Ub Myh,” Financial Services Outlook, Ac Ep Iu, Ocb 2009.




Securitization and structured products. Scuz— pjvy dcbd h “ dbu pc”—h b bd hfc c. Bu cuz y fc. I cuz w cu h fc c, w d. A w h cd d?F dcd, whu u cd, cuz h b ud fc c, cd cd d jub h w b cquby F M d Fdd Mc. T pb w cuz , wh wk d hh k h cuz fcd. Ud h cy cuz, cy h czd db b,kw CDO. T u w “xc ” bcu hy w uy bckd by h ubp h b du hu ub wh hbubb dd, d w d cu d wh h wud uy . CDO, ccdy, h dc c, w ju h xp h wy whch ubp d h hh k w dbud huhu

h wd’ fc y. T qu why y wk w cd, why y h cuzd d cud cuzbd .

Credit deault swaps and other derivatives. Dp d ch, h FCICv ucvd vdc h uud dvv, d pcuy cddu wp (CDS), w fc cbu h fc c huh“cc”. T y cpy kw hv d bcu CDSb w AIG, d h f pp hv b u. B CDS h fc c bcu cpy dd k ppy kb d y wh bk . Lk vyh , dvv cb ud, bu h vdc h h “cc” fcu d hv cud h c w fcy hcd by CDS dvv y. F xp, Lh Bh w j py h

dvv k, bu h C ud dc h Lh’ u CDS d h dvv b cud fc y h f, cud h h hd w CDS Lh .

Predatory lending . T C’ p b pdy d h bud-up ubp d h hh k h fcy. T h b pub xp h w vdc h pdy d w wdpd hv pducd h vu hh k hw cuy d. I pdy d, ucupuu d k dv uw bw. T udubdy ccud, bu pp h y pp wh cvd hh k w pdy bw, d ud, bcu hy k dv w udwdd bf hy kw hy cud py u hu pc bd h fc. T C w v b

hd y h h x whch pdy d ccud. Subp h C jy’ p dcb buv cv by d d bk, bu whu v y dc hw y uch w d. Fuh, h jy’ p ckwd h h buy ubp w v c pv cpcpy wh v db hu qu.




Why Couldn’t We Reach Agreement?

A h jy’ p pubhd, y pp w h w pb chv bp h c. I y b uph I k h qu. I h C’ v hd b bjcv d huh v, y h p I h dwud hv b kw h h c b d h d, dphp wud hv b u wh h. Sy, I h hv ud ch chd y w vw. Bu h C’ v w ucud cd u wy h cud v hv d y upp , I bv, hupp h h Rpubc b.

O xp w u h C’ ck bjcvy.I Mch 2010, Edwd P, d w h Ac EpIu (AEI) wh hd vd ch cd c F M, pvdd h C 70-p, uy ucd du h ub ubp d h hh k h fc y dy bh fc c. I h du, P cdd h h hd ud v25 uch (h wk hwd h h w ppxy 27).2 Sc h bu 55 h U.S., P’ chdcd h, h fc c b, hal U.S. w quy d b du wh hu pc w . I Auu,P uppd h ch wh pp dcu h hDp Hu d Ub Dvp (HUD), v w dcd dhuh w d, c h whp by duc udw dd.3

T ch d p qu bu h vhu pcy p h hh k h pyd uch ky

bh h dw d h fc pc h wd. Ay bjcvv h cu h fc c wud hv kd cuy hch, xpd h b h C, k P’ y,d d h ccucy P’ ch. Bu h C k hp. P’ ch w v d vb h h b h FCIC, v h c wh w b h ubc chd whcd h hu pcy h fc c.

Accdy, h C jy’ p hyph bu hcu h fc c h y bjcv v wud hv cdd,wh cu y h h hv pc cucy bu puby.T h wy u d bjcv quy hud hv b cd u, buh hw h C ud uc d d.

T w y h dfcc. T cp h C’ wk w

dd by pubc h h w hdd u y Dcb 2009.A h p h C b hd v dcud h pb cu h c, d w w v d why h pcu ubjc w p w ch h ky u h h wud h bckb

2 Edwd P, “ h Fc C” ( ), hp://www../pp/100174.

3 Edwd P, “Gv Hu Pc h Ld-up h Fc C: A Fc Sudy,”hp//ww../dcLb/Gv-Hu-Pc-Fc-C-P-102110.pd.




h C’ wk. T C b dd h dcu dcd h cu h fc c u Juy, 2010, w w dc h cv h . T C vwd hudd w, d h jy’ p u uch “Sh d h FCICh….” Hwv, u h w pubc, h c w dh vw wud ccu, dd kw wh w b vwd, w cud d, d cu dd hv ppuy qu huc udd h cx whch h qud w d. TC jy’ p u h p ubu d, whch by ck h p; p wh uch, pcy hdh d wh v whu ppuy ch.

T C’ uhz u qud h h C p b Dcb 15, 2010. T p w u d h p Ap. W dd’ y d u Nvb. W w h v

ppuy ub c w, bu v hd ppuy v h wd up kw whh u c w ccpd. Wcvd cp cpy h jy’ p, h f , Dcb 15.I w 900 dub-pcd p . T d ppv h p wh dy , Dcb 23. T h wy chv bp p, h u y up h k h u uy.

T d zd w: P I uz h p h d. P II dcb hw h u ubp d h hhk dv h wh h bubb d wkd fc uud h wd wh h b du. P III u dh hu pc h U.S. v h w py pb hc h ppxy h U.S. 2007 w ubp hw w quy. P IV b ccu.



451

SUMMARY

Ahuh h w y cbu c, h hu bubb 1997-2007 wud hv chd dzzy hh d , wudh fc c 2008 hv ud, bu h pyd by h hupc h Ud S v v h cu w d.A u h pc, by h dd 2007, h w ppxy 27 ubp d A-A h U.S. fc y—h ud—wh vu v $4.5 .4 T wupcdd ub, hh h y h p, d h cd wh h dqucy d du h uy ccu h wk d dup h fc y h h bc kw hfc c.

M ubp d A-A hh k . A ubp bw wh h bhd cd, uuy fd by FICO cd c w h 660.5 ypcy, ubp bw h d

4 U hw dcd, h ub ubp d A-A ud, w h u pcfc uch vu d dqucy , c chd by Edwd P, d w h Ac Ep Iu. P cu h hu fc duy d ch cd c F M. Much h wk pd bh y d P’ ch p AEI w: hp://www../dcLb/P-Sz--Expu.pd, whch ccu 27 hh k ; hp://www../dcLb/P-Sz--Fd-Cbu.pd, whch cv h p h h w hd ud by d c d h u bk h d h ud CRA; d hp://www../dcLb/P-Hh-LV-Subp-A-A.pd, whch cv h cqu h by v c h y 1990. T h d uy cd uc. T d w h d xhb P du ubd hFCIC Juy 2010, d vd d updd Mch 2010 (ccvy, h “ ”).

5 O h cu y udy h k h c h h ky dfhv v b uy d up. F y y, F M d ubp y hh puchd ubp . Inside Mortgage Finance, c uc d h k, d d cdd ubp y h pd ubp by h by F d Fdd. Oh w cdd p, v hy hd cd ch wud hv cfd h ubp. Hwv, FICO cd c h 660 y dd ubp , hw d. T h dd, xp, ud by hO c h Cp h Cucy. I h d P’ wk h u, h cfd ubp by h cd “-dd” ubp , d bw wh FICO c h 660 cd ubp by chcc. F d Fddpd y vy pc h ubp, c h ubp cqudby F d Fdd hud b ddd h -dd ubp d by h d dv h c h ub d pcp u h ubp ud h fc y y v . O h p Edwd P’ wk w hw h F d Fdd, y y p h fc c, w buy h hudhv b cfd ubp bcu h bw’ cd c d py bcu hy wd by ubp d. F d Fdd dd d h u hy w k v by h d v. T ck dcu h p h GSE pp hv b c h u y k bv h p vy h du wh hhu bubb dd 2007.




h p h fc b. B ch v pcy h y 1990, bw wh FICO c bw 660 dd quy p bw d hd d cuy b cd h h huhh Fd Hu Ad (FHA), h v’ ubpd, huh vy ub pczd ubp d.

A A-A h dfc by . I y hv djub , ck dcu bu h bw, qu py y, b d v hu, ppcv hw.Ah ky dfccy y A-A hh --vu —h, w dwpy. A w dwpy h y y h bw’ck fc uc, d h ck “k h ” ducdbw c h h. U hy bc ubjc HUD’ dbhu qu, b h y 1990, F d Fdd dcqud wh h dfcc.

Gv h khd h ub ubp d A-A wud du c h hu bubb b d d- 2007—whdv c h U.S. cy d fc y—h ky qu h FCIC w d why, b h y 1990, udw dd b d fcy h w pb c 27 ubp d A-A . T C v d u udy h qu, huh udd why d hw h hppdu b vwd h c qu h fc c.

F h b, h C’ v w d vdh dd v bu h fc c—h w cud by du ck u, wk k , pdy d, uuddvv d d W S. Oh hyph w h v cdd w d y upfcy. I ccz h C, h

dd ccz h , whch wkd dy d cvy udd cu ccuc, d dd xdy f wk h d hy w dcd cv. T C’ u w u .

1. Government Policies Resulted in anUnprecedented Number of Risky Mortgages

T pcfc v p w py pb hwh ubp d A-A h U.S. cy bw 1992 d2008, d h dc udw dd h ud.

Te GSEs’ Aordable Housing Mission. T c h hh k d h U.S. by h dd 2007 w chc

v, dd ju hpp h bk d h dcdd h w y cd p hbuy b h 1990.I 1992, C cd XIII h Hu d Cuy

Dvp Ac 19926 ( h GSE Ac), dd v w d

6 Pubc Lw 102-550, 106 S. 3672, H.R. 5334, cd Ocb 28, 1992.




d c7 bw b cc cd huh F Md Fdd Mc. T , pbby ud by d c hwhp, uy bc u h qud F d Fdd duc h udw dd hy ud wh cqu . A h S C p d h , “T pup [h db hu] c h dvp bh F Md Fdd Mc bu h w b uy d hpduc, cuu d dy--dy p vc h fc d w-d-d-c p, c d -cy d.”8 T GSE Ac, d ubqu c by HUD, ch h ucu h k h U.S. d pcuy h du dd d udw dd. Accdy, h d , I w h ubp d A-A hw cqud bcu h db hu AH , w h ubp

d A-A , -d , NMT GSE Ac w dc dpu h ccp h GSE cdy k p . F M w bhd v cy h Nw D buy bk d h , pvd h wh w ud wh whch k dd. I 1968, w uhzd h h pubc d bc v-pd p (GSE)9— hhd-wd cpy wh v qud cdy k . FddMc w chd by C h GSE 1970. F d Fdd cdu h cvy u h y 1990, d h pc bhdcvv d dd h hy w w puch,cud uch dwpy 10 20 pc, d u cddd bw.

T GSE Ac, hwv, cd w “” F M d FddMc— pby upp db hu—d uhzd HUD bh d d wh w c qu y whch c pc F d Fdd puch hd b w-d- d c (LMI) bw—dfd p wh c bw h d c pcu bw v c w c cu. T AH pu F d Fdd dc cpwh h FHA, whch w h d dy cy wh HUD h uc h d v’ pcp ubp d.

7 Lw c uuy dfd 80 pc d c (AMI) d d c 100 pc AMI.

8 Rp h C Bk Hu d Ub A, Ud S S ccpy

S. 2733. Rp 102-282, My 15, 1992, pp. 34-5.9 F d Fdd w cdd b v pd p bcu hy hd bchd by C d w v vu pv (uch xp h Scu Ac 1933 d h Scu Exch Ac 1934) d cd h uy h d pcd v upp. A u, h cp k (whch cud c h “Ac”)ud h h v fc d cu h v wud d bhd h. T pdv bck v h cc ud h w w c h y AAA bw d y w b p v h ppcb uy .




Ov h x 15 y, HUD cy hcd d d h AH. I h GSE Ac, C hd y pcfd h 30 pc h GSE’ puch h AH . T w cd 42 pc 1995,d 50 pc 2000. By 2008, h LMI w 56 pc, d pcdb ub hd b ddd qu h 27 pc h cqudby h GSE b d bw wh w bw 80 pc dc (AMI). b 10, p 510, hw h F d Fdd h vy y bw 1996 d 2008.

T vy d vb cc F d Fdd’ cqu ubp d A-A h y 1990, d cu h GSE’y-by-y cqu h dy h AH w c. Hwv, P h vu h puch ppxy $4.1 ( b 7, p 504). A hw b 1, p 456, Ju 30,2008, dy p h h fc c, h GSE hd hd

ud 12 ubp d A-A . T w 37 pc h xpu 32 , whch u w ppxy 58 pc h 55 ud h U.S. h d. F d Fdd,ccdy, w by h d py h U.S. k bh fc c d h udw dd y h dd h h fc duy.

Te Community Reinvestment Act . I 1995, h u ud hCuy Rv Ac (CRA)10 w hd. A y dpd 1977, h CRA d cd u qud y h ud bkd S&L ch u w-c bw cu hy vd. Tw u, d cv 1995, h f qud ud bkd S&L d h hy w cuy k w-ccu d w-c bw.11 A quy CRA w d

bw bw 80 pc h AMI, d hu w h h F d Fdd w qud buy ud HUD’ AH .

I 2007, h N Cuy Rv C (NCRC), ub z cuy cv z, pd h bw1997 d 2007 bk h w k uy ppv cd wh cuy up k v $4.5 CRA .12 A ub p h c pp hv b cvd , d hu wud hv cbud uby h ub ubp d h hh k ud 2008. F h , hy dvd C v d y. Uuy, ud PIII, h w d.

Accdy, h GSE Ac pu F d Fdd, FHA, d h bkh w k CRA cp h —

bw bw h ppcb AMI.HUD’s Best Practices Initiative. I 1994, HUD ddd h up h

wh up “B Pcc Iv,” whch 117 b h M

10 Pub.L. 95-128, VIII h Hu d Cuy Dvp Ac 1977, 91 S. 1147, 12U.S.C. § 2901 et seq.

11 hp://www.dc.v/u/w/u/2000-6500.h.

12 S hp://www.cuy-wh./_pd/c-pubc/cdf/p-v-bw.pd.




Bk Ac vuy dhd. A hw , h p w xpcy dd cu duc udw dd c ccby w c bw cd. Cuywd w by h b h up d by h y 2000 w cp, wh h, h NM uh by F d Fdd, FHA, d h bk ud hCRA .

Wh h k h , w ky h hwud fd uh bw wh cud h d ddd h F d Fdd hd bhd. I cd d cd dc udw dd, c vy h cp w k NM pup pf bu d bpd by h v. T bvu wy h b w py duc h udw dd h pdd cpc wh h v’qu.

Idd, by h y 1990, d udw dd hd c b bc h whp by LMI . I 1991 S BkC h, G Cc, hhy pcd upp w-cd, bvd h “Ld w pd h cvv ddu [F M d Fdd Mc] v d cvc h xpd hcy w udw.”13

I h h, pp h C u dby h GSE Ac y ch h cuu h GSE, bu up ch h wudduc d udw dd v , h h whpwud b ccb LMI bw. F xp, h dcdh GSE udy “T pc p udw ddh—(A) bh dwpy qu 5 pc ;14 (B) w h u ch hd uc dwpy; d (C)

ppv bw wh hv cd hy dquc h bw cd cy cd hy h 12-h pd d h d h ppc h .”15 N h w p d udw dd udd h .

I hv b ub fd y ud by F Fdd p h c dc, bu HUD d h cu d u hAH ch d h d dd. HUD w vy xpc bu h, hw P II. I h d, h w ccphd by duy xpd h qu d h AH v uccdy, h h y wy F d Fdd cud h AH w by puch c ub ubp d A-A , d pcuy wh w dwpy. Bcu h GSE w h dpy h k, h puch pu cpv pu

h h h w ubjc v c—FHA d h bk

13 A Fhb, “F h H-Epy G: T R Cuy Advccy Rdf hPubc Rpb Gv-Spd Hu Ep”, Chp 7 Organizing Accessto Capital: Advocacy and the Democratization o Financial Institutions, 2003, Gy Squ, d.14 A h h GSE’ u dwpy w 5 pc, d w ccpd by cvvudw. T c qu w bk huh h .

15 GSE Ac, Sc 1354().




ud CRA— ch dp ubp d d fd h hy dd cpy wh h w v qu. T w u h bk—h whch w Cuywd—h w bud p db hu huh HUD’ B Pcc Iv.

By 2008, h u h v p w upcddub ubp d h hh k h U.S. fc y. b1 hw whch c f w hd h cd k h -- hd dbud v huh -bckd cu (MBS)--dy b h fc c b. A b 1 k c, vc, pv u c ud v dc, h hd hd ud 19.2 h NM h w ud h p.By c, bu 7.8 NM hd b dbud v huh huc pv -bckd cu, PMBS,16 py by pvu uch Cuywd d h ubp d.

T c h h cd k w-hd h NM h fcy w hd by h v by c ud v cd h c h v’ pc h dvp h 1997-2007 hu bubb, h dw h ccud wh hbubb dd, d h fc c d c h ud. Sy, hc h y 7.8 NM w hd by v d fc u h PMBS hw h h up NM w p cu h fc c h h v’ . T C jy’ pcu y h 7.8 PMBS, d hu xp d h v’ h fc c.

b 1.17

Ey N. Subp

d A-A L

Upd Pcp Au

F M d Fdd Mc 12 $1.8

FHA d h Fd* 5 $0.6

CRA d HUD P 2.2 $0.3

F G 9. $.7

Oh (cud ubp dA-A PMBS ud by Cuywd,W S d h)

7.8 $1.9

7 $.

*Icud V Ad, Fd H L Bk d h.

b u, h v’ c h whp huh hAH uccdd. H whp h U.S. cd ppxy 64 pc 1994 (wh hd b 30 y) v 69 pc 2004. 18 A vy d u v w pd wh h—

16 I h pc kw cuz, cu bckd by p (-bckd cu, MBS) d ud by pv c f w kw pv b cu(duh h cu ud by h GSE G M) pv MBS (PMBS).17 S Edwd P’ y Exhb 2 h M, Ap 21, 2010, p.4. hp://www../dcLb/P-Sz--Fd-Cbu.pd.

18 Cu Buu d.




U.S. hu pcy—u h u c bc c wh h cp hhu bubb 2007. T b pc h h b b.

2. he Great Housing Bubble and Its Effects

Fu 1 bw, bd h d Rb J. Sh, hw h dcwh h 1997-2007 hu bubb h Ud S. By d-2007, hpc h U.S. hd cd uby y. T wh d hd b 90 pc, h y h hu bubb d . A dcud bw, h d bv h h 1997-2007 bubb w d xdd h pvu bubb bcu h v’ hu pc, whch fcy cd h dd hu by u y h hu k h wud hv bvb d d dd hd b d d h v

hd pd h wh ubp d.Fu 1. T Bubb Accd Sh

T h 1997-2007 bubb d bu wc h p hububb fc . M quy dc hu bubb wd y ucu h w w buy hy py xpv h; h c h h c bubb w

-vd w p u ducv wh dd.Why dd h bubb ? Hu bubb d wh dquc ddu b pp uuu ub. Iv d cd z h hk cp u. O by , v ch d v. Evuy,h bubb p u, h wh h u h d, d d pc . Gy, h p, h pc k h u y. I hc h c bubb, k . T h vy h




j pcp h k w pf d w wd buh k h w c. I w h U.S. v, puu c pcy—c hwhp by k cd vb w d d c bw—d qu h c d fcu cd cud uc huh u kp pupy hu h bubb, , wud hv dd.

Ec hv b vuy db whh h Fd’ y pcy h y 2000 cud h bubb by kp w .Nuy uh, B Bk d A Gp hv ud h h Fd w u. O h h hd, Jh y, uh h y u, cdh h Fd’ v h y u w h pcp cu h bubb.Rhu Rj, p h Chc Bh Sch Bu, u hh Fd’ w cud h bubb, bu h h Fd cuy wd hpcy d cb upy h h d.19 Oh h

b hu w ud k cu h wcyc h d hy cvd d upu wh h U.S. T db,hwv, y b h p. I d’ wh h ud h bu hbubb cuy d; h p qu why hy w d h NM h w p u h bubb dd.

Fu 2 u cy h h 1997-2007 bubb w bu ud 27 ubp d A-A d hw h hp bw hcuuv wh h d u NM d h wh h bubb v. I cud bh GSE d CRA cbu h ub udNM bv h b 30 pc,20 d d CRA d udh -d c h u bk—Bk Ac, WF, Cbk d JPM Ch—h, wh h pdc, d h c. A d bv, h c w d cc

wh ppc d u ppv cqu. Td u vvd w k 2007 p by h NCRC,21 d djud ucd d ky d. T cuuv d CRA

19 S, Bk y b h FCIC, Spb 2, 2010, A Gp, “T C,” ScdD: Mch 9, 2010, y, y b h FCIC Ocb 20, 2009, Jh B. y, Getting O rack, Hv Iu P, 2009; d Rhu Rj, Fault Lines: How Hidden Fractures Still Treaten the World Economy, Pc Uvy P, 2010, pp. 108-110.

20 I pp h h GSE’ k cudd bu 30 pc h w d bw wh w bw h d c h whch hy vd d w hu b AH cd. I w y wh h AH bv h v, b 1995, h vpcy qud h GSE cqu AH quy h hy wud hv puchd cu. I h c h CRA cbu, h b 1992, d cud h c

d by h u bk d h pdc d h NCRC p, djud h cuy ucd by h bk h d.

21 I 2007, h N Cuy Rv C pubhd p pcp u CRA h bk hd cd k cc wh ppc. T pcd h h c xcdd $4.5 . T p w vd hNCRC’ wb, bu c b ud hp://www.cuy-wh./_pd/c-pubc/cdf/p-v-bw.pd. A p h c w c ufd huh CRAquy . A u dcu h c d h ub d puu h cd Sc III.




pduc cud $1 NM d by CuywdFc ud HUD’ B Pcc Iv.22

Fu 2. T Ec Gv Pc h Gwh h Bubb

I u h vy bubb--v bubb-- h h p cu fc c wh d. T c b 2 bw, ppd by P Dwh J h H Bu Sch U.C. Bky. T b hwh h dvpd cu—y whch hd bubb du h1997-2007 pd—h cd wh dquc d du

wh h bubb dd w w h h ud h U.S. whh 1997-2007 dd.

22 S 144.




b 2.23 ubd M, W Eup d h Ud S

≥ 3 MhA %

Ipd Dubu %

Fcu Y

Bu 0.46% 2009

Dk 0.53% 2009

Fc 0.93% 2008

Id 3.32% 2009

Iy 3.00% 2008

Pu 1.17% 2009

Sp 3.04% 0.24% 2009

Swd 1.00% 2009

UK 2.44% 0.19% 2009

U.S. A L 9.47% 4.58% 2009

U.S. P 6.73% 3.31% 2009U.S. Subp 25.26% 15.58% 2009

Suc: Eup M Fd (2010) d M Bk Ac U.S. D.

T udy h uc P J’ d wpvdd y b h S Bk C Spb 2010 by D. Mch L, Dc h Cky McM C R E S DS Uvy:

T du d cu xpc h U.S. k h b w h h cu. Su du h 3 pc h cud h 1 pc Au d Cd. O h cu h uvy y Id, Sp d h UK hv fc c du duh c.

T v c pb h u. F ub-p d w -x ud h U.S. T y cuy wh fc ubph w h UK ( pk 8 pc 2006). Subp ccud 5 pc Cd, h 2 pc Au d bpp wh.

…[]h w “k y” d dcu ubp bw wh dwpy. T w “ dc”d…h pp wh dwpy w h hU.S. d h dc hu pc cu w …[L] hdvpd cu wh cu d d uy bw dfccy jud.24

T c h h ducv h 1997-2007 bubb c cp—h ub NM cd—h h z ud by d cu pubhd by h M Bk

23 Dwh M. J, “R h U.S. M Mk Tuh Pv Mk Icv,” Ppppd p “P, P d Fuu h Gv Spd Ep,”Fd Rv Bk S. Lu, Nv 17, 2010, b 4.24 D. Mch J. L, y b h Subc Scuy d I d dFc h S Bk C, Spb 29, 2010, p.6.




Ac (MBA).25 T d w cp bw h cu h hv hu c u h 1997-2007 bubb d h cu hw c hu bubb (1977-1979 d 1985-1989) hw Fu 1.A h hu bubb h dd 1979, wh w p h d yp, cu h u dwu chd hh p y .87 pc 1983. A h x bubb, whch dd 1989d whch hh pp h w h d yp, cu chd hh 1.32 pc 1994. Hwv, h cp h1997-2007 bubb— whch h w NM—cu chd h upcdd v (hu ) 5.3 pc 2009. Ad h w udp uu v d bk pv dy cu.

A h d fc pp y h v pcy d NM h fc c. Wh u hwhv c w y w bd h hv hd

c h U.S. hu bubb, h d h bubb d hvb ducv. I w’ ju h z h bubb; w h c. Tu dqucy h U.S. ( b 3 bw) w pcdwh, py bcu h dvpd cu dd hv h ub NM h w p h U.S. fc y wh h bubb dd.A hw c h d, h du w d hu hu pc dc d h—huh h PMBS hy whd— cu pp fc wk h bk d h fh hd h cu.

Accdy, h 1997-2007 hu bubb hd b dd wh upcdd ub NM, ky h h fc c wud vhv ccud.

3. Delinquency Rateson Nontraditional Mortgages

NM -d bcu, y y b h vdpd db hu pc, h kd cud y p hu h Ud S.26 T d d—kw cv —y hd fxd , 15 30 y, dwpy 10 20 pc, d w d bwwh hd jb, dy c d d cd cd. B h GSE Ac, vubp , huh d bw wh pd cd, vvdub dwpy x quy h.27

b 3 hw h dqucy h NM h w ud

Ju 30, 2008. T yd c vuy h NM. T c quy, bd dqucy , bw h d F d Fddp 9 d 10 c.

25 M Bk Ac N Dqucy Suvy.

26 S P, “Gv Hu Pc h Ld-Up h Fc C: A Fc Sudy,”Nvb 4, 2010, p.58, hp://www../dcLb/Gv-Hu-Pc-Fc-C-P-102110.pd.

27 Id., p.42.




b 3.28 Dqucy d

L yp Ed # L Dqucy R(30+ Dy d Fcu)

1. Hh R Subp (cud F/Fdd pv MBS hd)

6.7 45.0%

2. Op A 1.1 30.5%

3. A-A (c. F/Fdd/FHLBpv MBS hd)

2.4 † 23.0%

4. F Subp/A-A/Np 6.6 17.3%

5. Fdd Subp/A-A/Np 4.1 13.8%

6. Gv 4.8 13.5%

S # L .7

7. N-Acy Jub P 9.4 ‡ 6.8%

8. N-Acy C P * 5.6%

9. F P ** 11.2 2.6%10. Fdd P *** 8.7 2.0%

# L

* Icud d 1 ubp (FICO<660) h w () hh d () -pCRA d HUD B Pcc Iv . T cudd h “CRA d HUD P” b 1.** Excud F ubp/A-A/p.*** Excud Fdd ubp/A-A/p.† Excud wd cuzd by F d Fdd.‡ N-cy jub p d c p cud h. dqucy d uc:1, 2, 3, 6, 7 & 8: Ld Pc Svc, LPS M M, Ju 2009.4 & 9: Bd F M 2009 2Q Cd Supp. Cvd u dqucy (90+ dy & cu) d Dqucy R (30+ dy d cu).5 & 10: Bd Fdd Mc 2009 2Q Fc Ru Supp. Cvd u

dqucy (90+ dy & cu) d Dqucy R (30+ dy d cu).

4. he Origin and Growth of Subprime PMBS

I w y 2002 h h k ubp PMBS—h pv-bckd cu bckd by ubp h NM—chd$100 b. I h y, h p fv u w GMAC-RFC ($11.5 b),Lh ($10.6 b), CS F B ($10.5 b), Bk Ac ($10.4b) d Aqu ($9 b).29 T uc PMBS h y d$134 b, whch $43 b PMBS w ud by W S fcu. I ubqu y, h k w, W S u bhd h j ubp u, h by 2005—h b y ubp

PMBS uc—y Lh w h p fv u d W Su up w y 27 pc h $507 b PMBS uc h y.30

28 Id., Fu 53.

29 Id M Fc, Te 2009 Mortgage Market Statistical Annual—Vol. II , p143.

30 Id., p.140.




O h y yh bu h fc c h W S bk dh wy ubp d d h GSE wd. T C jy’p dp h d wy xp why F d Fdd cqud y NM. T py d wh h c. N y wW S u c h ubp PMBS k, bu w b2002 F d Fdd w uch b py h h PMBS k h bu cqu NM d h ubp . b 7, p 504,hw h F d Fdd hd dy cqud $701 b NMby 2001. Obvuy, h GSE dd hv w y NM ubpd; hy w dy h d py h k b 2002. b7 hw h 2002, wh h PMBS k w $134 b, Fd Fdd cqud $206 b wh ubp d $368 b h NM, d h h GSE w ky dw b h PMBS k b dvp.

Fuh vdc bu whch f w f ubp NM d pvdd by F’ 2002 10-K. T dcu dcu p h 14 pc F’ cd b (h p ud) hd FICO cdc bw 660 Dcb 31, 2000, 16 pc h d 2001 d 17pc h d 2002.31 S F d Fdd w cv d j buy ubp y wh h PMBS k hd uc y $55b (2000) d $94 b (2001). I h wd, wud b ccu y h W S wd F d Fdd ubp d hh vc v. A h , h GSE’ puch ubp wh huhu h 1990 ud h wh h ubp d duy,whch uy bc h y h ubp PMBS k h 2000.

2005 w h b y PMBS ubp uc, d Aqu($54 b) d Cuywd ($38 b) w h w u h p

25. T ub w wh F d Fdd hd bbuy c d bc vb 1997. T b 7 F dFdd bw 1997 d 2007 ppxy $1.5 ubp d v $4 NM up.

Bcu ubp PMBS w ch NM b cd udHUD’ AH , F d Fdd w h dvdu puch ubp PMBS 2002 2006, cqu 33 pc h uc, $579 b.32 I b 3 bv, whch z by dqucy ,h puch cudd 1, whch hd h hh dqucy.T w -dd ubp—dd ubp by h dwh d—d hu hd w FICO c d uuy hh h p ; y hd w dwpy d w ubjc hdfcc.

Uy, HUD’ pc w pb bh h p quy h ubp d A-A h bckd h PMBS d h uz whch h k w. T w u y bcu F d Fdd

31 2003 10-K, b 33, p.84 hp://www.c.v/Achv/d/d/310522/000095013303001151/w8423910vk.h#031.

32 S b 3 “Hh LV, Subp d A-A O Ov h Pd 1992-2007 d F,Fdd, FHA d VA’ R” ud hp://www../dcLb/P-Hh-LV-Subp-A-A.pd.




ud h wh h k huh h puch PMBS, bu bcu h hu w v v-dcd ud hhu k ud wh wud hv b hu bubb bubb upcdd z d du. T cud d bd upcddwh h PMBS k w wy.

F, h du c h AH , h cp bw h GSEd h FHA, h c HUD’ B Pcc Iv, d bk d udh CRA, ud cu w ud wk d wk .T hd h c xd h h hu bubb w c z. T wh h bubb u dud h wk h ubp cd; hu pc , ubp bw wh hhw hv dud w b fc h , u h quy h hd dvpd h h y huh h pc. Whu hcuu u v v-dcd ud, dquc

d du wud hv bu hw up wh y w, b hubp PMBS k h. Id, h bubb d y, ph k w u chd $2 .

Scd, hu pc h bubb, w cy bw k k hy cud d h hy py xpvh. T v w d k db, uch pARM (u v z) d -y . M h kd cud b ub bw, bu h wh w y b ubp . Nvh, ubp w cy PMBS,bcu hy y b hh d hu cud upp h ydh v w xpc. A ubp w d, F dFdd w w cu h h h h AH ; v,bcu h w c ud, hy w b buy h “b h w,”

h hh quy h NM . T c—h d hhyd d h by F d Fdd py up h hy wd—dv pv c u uh u h k cuv hy uh h dd v wh w k xpu ubp PMBS.F h v’ ppcv, h bubb kp w, PMBS w h hh yd cd wh k bu w hw cuub dquc d du.

5. What was Known About NMsPrior to the Crisis?

Vuy vy wh fd b h C d h hfc c w d by h dw h b wh h hububb b d 2007. N h w, hwv, cudh cdc cud by h C, h pv h c, h c fc u h w uy dd by h dwd, u d upv fc u d vh wd v W Bu,33 hv udd h d

33 S Bu, y b h FCIC, Ju 2, 2010.




h NM pbm cgzd gfcc b h bubb dd.T Cmm mjy’ p h “h w wg g.” Twy ch hm; hy m vb hdgh, whch hCmm mjy, d my h p c h pp, hppy ggd. Hwv, Mch Lw’ ccmd bk, Te Big Short , hwd

vvdy, vy w pp h fc wd w cuy wg b my—v muy vb dd—h h bubb wud bu wh hug .M m hv umd h NM w p h fc ym, bu uuuy g umb.

Ev dy, h w c h md h umb NM hhd ccumud h U.S. fc ym b h mdw bg. Y h by h m mp c bu h fc c. N h h cd by h Cmm mjy xp h c—ck gu, pguy d k mgm gh, W S gd d cmp

pc, ymc k cud by cd du wp, xcv qudy d y cd—d puby h u g pcg h 27 m NMh xd h fc ym 2007.

I pp h mk pcp w uppd h ducv h bubb’ cp bcu chc ck m bu h cmp h mgg mk. I Spmb 2007, xmp, h d hbubb hd bgu, d vu fc fm w bgg cu cpd qudy d cu, w Lhm Bh y ud hghy ddp d “Wh Ow Rd Cd Rk?”34 I h b cd whh p, hy md h upd pcp bc ubpm d A-Amgg udg $2.4 , bu h h cu umb h m.Bd h m, wh hy ppd c whch hugpc dcd bu 30 pc, hy ud h “[]h ggg h

d mgg mk ud h ‘d’ hug cd cud b bu$240 b, whch mgb, umg mz v fv- x-yhz.” I h d, cu, h w much g, d w cgzdud mk--mk ccug m mmdy, h h v fv xy pd. Bu h u h w y cgz h h z hubpm d A-A mk, v 2007, h mp p.

Ag wh m h bv, h Lhm y w w h u cmp h mgg mk 2007. Ud h “d” hugcd hy ppd, hy pjcd h h GSE wud u ggg $9.5 b ( mgg uc cvg) d h h gu cm wud b m h u c cv h . Bd kw d pjc cy md by h Fd Hug Fc Agcy (FHFA), hGSE’ cd cud $350 b—m h 35 m h Lhm

y’ Spmb 2007 m. T y cud y mk uch c hy dd z h 37 pc— $1.65 — h GSE’ cdk p cd ubpm d A-A ( b 1, supra) hh wk wud ccu bu 75% h GSE’ du v 2007-

34 Vk Shpkdu d Og Gdk, “Wh Ow Rd Cd Rk?”Lehman BrothersFixed Income U.S. Securitized Products Research, Spmb 7, 2007.




2010.35 I ucv cp h Lh y’ h h 2006 v ubp wud u 19 pc ud “d”cd h, , d . I y 2010, xp,Mdy’ d h 2006 v d pjcd 38 pc h 30 pc dc hu pc hd cuy ccud.36

T Lh pjc u h h y dd hv ccu h ub NM cuy ud 2006. Idd, Ihv ud y ud h pd b h fc c whch y—ch fc y—cuy d udd hw y NM w h fc y h . I w y h fc c, wh y AEIcu, Edwd P, b h h vu udd dp uc h h ub NM h fc kbc c. A u, pjc b P’ wk w bud buy.

Much h C jy’ p, whch ccz f, u,cp xcuv, k d cy y u pcvh h y hd, h hdh. I pp h bu hcp h k w py kw wh h bubb b d. T C v pd u udy wh w kwbu h cp h k 2007, ppy fd py b k pcp udd h k h y b h,whu y udd wh w cuy vb.

T k udd cy by hud y,cdc, u, d d v. Hw cud h pp hvd h p h cu ub NM ud? Mk pcp pp hv ud h bubb y h F dFdd cud dh h cvv udw pc hy

hd pvuy puud. U F d Fdd w qud HUD’ AH, hy y cqud ubp h w quy . Idd, h

vy df d p w h F d Fddwud buy. L w jcd, d w uy ud by FHA dby vy up ubp d v.

Ahuh y wh wd HUD’ AH u, d huh huhh pc, wud hv zd h F d Fdd u hv bh h buy cv w quy , w pp hd cv ucv h w buy p. Iv bvd h h w fck MBS bckd by F d Fdd, c hy w huh (ccy, u u) b pcy bckd by h d v. I dd, hGSE w xpd by w hv f wh h Scu dExch C (SEC)--hy d f vuy 2002--v h

dcu b d qu y bu h quy h .

Wh F vuy b f p wh h SEC 2003, dcd

35 F M, 2010 Scd Qu Cd Supp, hp://www..c//pd/c/2010/q2cd_uy.pd.

36 “Mdy’ Pjc L A H O Bc 2007 Subp MScu,” hp://kph.c/c/182556-dy-pjc----h---bc--2007-ubp--cu.




h 16 pc cd b hd FICO c h660—h c df ubp . T ccy qubu whh FICO c 660 h ppp dvd bw pd ubp . T d bk u u 660 h dvd ,37 d h cd upp pubhd h f wh 2008 10-K, Fcudd wh FICO c bw 660 dc xpu hw h h p. A Dcb 31, 2008, bw wh FICO h 660 hd u dqucy bu u h bw wh FICO qu h 660 (6.74% cpd 1.72%). 38 F dd p u f h FICO c h 660 w cdd ubp. Ahuh h d 2005 F w xpd $311 b ubp pd 2005 10-K ( fd wh h SEC u My 2, 2007) h:“T pc u -y cd bk bu c ubp ucud F M MBS bckd by ubp

w not material Dcb 31, 2005.”[ph uppd]39

F w b k h bcu dfd ubp puchd ubp d. Tu, 2007 10-K p, Fd: “Subp ypcy d by d pcz h by ubp dv d, u pc uqu ubp . I p u ubp xpu, we have classied mortgageloans as subprime i the mortgage loans are originated by one o these specialty lendersor a subprime division o a large lender .”40[ph uppd] T cd c h , d h k cd wh h cd c, w ddv. Accdy, 2007 10-K p, F w b k hw , v huh ky h h p hd uduh ubp dv h cpy vcy ub ub h w du:

Subp , whh hd u p bck F M MBS,pd less than 1% u -y bu vu ch 2007, 2006d 2005.41 [ph uppd]

W h ubp hd u p ubp bck F M MBS, xcud -cuzd pv b dcu bckd by ubp , pd ppxy 0.3% o our single-amily mortgage credit book o business Dcb 31, 2007, cpd wh0.2% d 0.1% Dcb 31, 2006 d 2005, pcvy.42[ph uppd]

T cud hv ud k pcp d h—cud

37 O c Cp h Cucy, Fd Rv, Fd Dp Iuc Cp,d O c T Supv dvd “Expdd Gudc Subp Ld P”,pubhd 2001, hp://www.dv.v/Bddc/SR/2001/01041.pd h “h ‘ubp’ h cd chcc dvdu bw. Subp bw ypcy hvwkd cd h h cud py dquc d pby v pb uch ch-, jud, d bkupc.” A FICO c 660 bw w vdc “vy hh du pbby.”

38 Dvd b 12.

39 F M, 2005 10-K p, fd My 2, 2007.

40 F M, 2007 F 10K, pp. 129 d 155.41 F M, 2007 F 10K, p.129.

42 F M, 2007 F 10K, p.130.




h Lh y— bv h F d Fdd dd hd hd ud ub ub hh k , d hu h h wy w uch h fc y h c xd.

O cu, h y 2000 h w y udd df h “ubp,” F d Fdd cud df hy kd, d hup h h GSE y d p cud b uppd by hpubc dcu. S wh F d Fdd pd h cqu

vu hy dd p h ubp A-A, d h cud w duy pcc by pc vuy h GSE’ h “p” cy. Whu uddF d Fdd’ pcu d -v cfc hd, hcp bu h GSE’ p py d u h h w p , hy hd wy b hp, d ddd h h ub p ud. Accdy, by

2008 h w ppxy 12 NM h fc y—d12 w p —h k pcp zd.Appdx 1 hw h h v dqucy d du wud b 86

pc hh h xpcd h w 12 NM h fc yd 12 p . Appdx 2 hw h h v dqucy wud b 150 pc hh h xpcd h dbck c dquc—cu w hu pc, dwwd p—w k ccu. T dc pjcd cud hv d h c bv h, v h bubb w d, h u wud b ub hv h c c d wud dvy c h AAA ch MBS cuz.

T C v kd h u, pd dwh k pcp bvd b h ub ubp d h NM

ud h y dy b h fc c. Whvpb h C’ pubc h, I kd y d h kpcp hw y NM hy bvd w ud b h fcc ccud. I w c h p h h w hd vcdd h qu, d ppd h upcd h h ub w uh uby c h cp h bubb.

I w y Nvb 10, 2008, F hd b k v by hd v, h h cpy dd 10-Q p h hdqu 2008 h hd cfd ubp A-A y h h puchd -dd ubp A-A , d h w ubp A-A bcu h k chcc. Ev hF w’ uy cdd. A dcb cfc c, F d,“[H]wv, w hv h wh u h A-A d

ubp h w hv cfd A-A ubp bcu hy d u cfc c.”43 T hdy dcbd h u u F’b.

O h u h ub NM ud b h c hC uduy vd y, d h C jy’ p

43 F M, 2008 3d qu 10-Q. p.115, hp://www..c//pd//2008/q32008.pd.




v dd h qu. HUD’ p duc udw dd cpd h FCIC’ y, h GSE’ AH d y p, CRA ddd, d h HUD’ B PccIv FHA’ cv d . N dvcd hccuu ubp h bubb h h h d—pc hjy’ p—h w pfb. I u, h jy’ p Hwhu h pc Dk.

Idd, h C’ v d b dcd z h NM d h v hu pcy. I h, h NM w “” h fc c, bu c h cp hbubb hd ccud h “wk d vub” h fc y—whch hd b h —cud h c. T d dfcccudd ck dqu u h -cd “hdw bk y”d v-h-cu dvv, h vy u cp

W S, d cuz (chczd “h dbud”). Ccdy, h pupd wk d vub hqud v u, huh h bu pc hd’ bd u h upcdd ub ubp d A-A , cd y cpy wh v hu pc, dud.

6. Conclusion

Wh up bu h y vw h cu h fc ch hv b pubhd c h Lh bkupcy, cud h C’w quy, h juxp w c: () h h bubbd h dw h wd d w h pcpcu— chczd h “”— h fc c, d ()

y udu vd x hw c b h udw dd dcd h p h h bubb cd y NM h w dy h bubb b d. Id hk huh wh wud cy hpp wh h vuy dppd bc h, y bv—cud h Cjy h p—pvd dy b h “wk d

vub” h k h fc uy y, whucd whh any y cud hv uvvd uch bw.

O h k xp h ppch w pd by Ly Su, h hd h Wh Hu cc cuc d h Pd’ky dv. I pv vw wh w h b h C(I w d h vw), Su w kd whh h dw w h cu h fc c. H p w h h fc

c w k f d h dw k “c bu” hw vy dy . W h c bu, h kd, h cu h f, w h d dy cd h ?44 T C jy dpd h d h w h d-dy . T c u h h dw h bubb dd d h fc c bcu h “vub” h h U.S. fc y h —h bc

44 FCIC, Su vw, p.77.




u, x u, pdy d, d W S d pcp h cuz y, cv k , d xcvv, h c. O h jy’ u h “30y du” hd “ppd wy ky ud” c; h cpy h 1991, h wk h S&L c, C dpd hFDIC Ipv Ac, whch w by h uh bk uy w ch dv dp uc d w cbd h c fy v h u h pw pu d bk c.

T ph u u b xc wy cuc hdc bw h C’ p d h d . WhSu chczd “c bu” w 27 hh k NM wh vu v $4.5 . L’ u c h: $4.5 hh k w not “c bu;” hy w k xpd uck h . T C’ p b h cd h fc

y; I b 27 ubp d A-A —h ud h U.S. 2008—d ub h pp hv b ukw k pcp h . N fc y, y vw,cud hv uvvd h u ub hh k c hbubb b d, d k cud hv vdd pc wh bcc h h ub du d dquc h xcdd yh h v h phcd k pcp xpcd.

T ccu h fc pcy pc. I c h fcc w cud by v hu pc, h h Ddd-Fk Ac wv vch d ucy. T ppp pcy chc w duc h v’ vv h d k, p fc w u h fc y.

* * * *

T bc h w u () hw h hh v dqucy d du h NM w d h fc y, d() hw h v pc uzd bv cud h ccuu upcdd ub NM h U.S. d ud h b.



471

II. HOW 27 MILLION NMS

PRECIPIAED A FINANCIAL CRISIS

Ahuh h C v dfd h fc c w uppd v, cy d d kw wh d p. I, xp, h fc c cu, h h c v pcuch h ubd A Rpuch P (ARP) hud b vud.

Hwv, c h C wd h C cc wh cud h upcdd v h ccud y h 2008,d h pup B Bk’ df h fc c ppp:

T cd b b uv y 2007 wh pb ucd wh ubp— d -cdwhy bw—d hu pc p h cuy b . M dquc d du , d hdwu hu pc fd, d h cu dy. Iv, udby hy hd bvd b , b pu bck wd cd k, d fc u— v d h —cu bck h d. T c dpd [ Spb 2008],wh h u -u v j fc f cud y fcd cd k z up.”45

I h wd, h fc c w h u h ud by fc u ud h wd wh U.S. b ub; h c bc v Spb 2008, wh h u v j fc f—whch hd w huh hd u -d —cud y fc k z up. Tuy cpu ub ccd v, bu k ch h udy cu h fc c w pd dc h vu pcfc d wdy hd : U.S. d . T x qu hw, xcy, h dquc d cud h fc c.

T w dcu w hw h w d-bckd cu h w h uc h c, bu py NM—cud PMBS bckd by NM. d , whch w y p , dd u ub h u h dw, huh h fc c ud c d hupc cud , p b ppch h v p h hd ccud p hu c. Hwv, hv w w h h NM, whch chd v dqucy d du bw 15 d 45 pc (dpd h chcc h

qu) bcu h vvd w wk c h y pvu hu c. T c h hy w ub h y

45 Spch Mhu C, Ap 14, 2009.




pvu bubb w wh cud h cphc hu pc dc h udh fc c.

1. How Failures Among NMswere ransmitted to the Financial System

Wh h hu bubb b d d-2007, dqucy NM b c uby. Pvuy, huh h w wk d hh k, h dqucy w vy w. T w cquc h bubb , whch d hu pc h hcud b d wh c wh bw cud h b. Avy, hu pc—cupd wh b ppu—cd quy h, w h h b fcdy, php v w . Hwv, hu pc vuy

chd h p wh v y cd cud kp h d , d h p h bubb d d wk bc xpd wh hy w. A W Bu h d, wh h d u, yu c wh’ w kd.

T h v’ hu pcy cuc h p. Adcud , h v hd b dc y h k d wh h whp, NM hbubb wud hv bu du vy hy w d. Tcuu w v v-bckd ud, hwv, kp hbubb w— y z bu v —d h dd upp hfc dquc d du h hd buh pvu bubb d y h u y. T xp why PMBS bd NM cud bc uu d ky whu h dquc d du h

cud bubb d wh h pd. Wh w d cu , Cuywd d h w b cuz ubpPMBS cy u 2002 ($134 b) 2006 ($483 b)whu d h ub c dquc h wud dy hv d v d buh h bubb h.46

Idd, h bc dquc hd h pp c. A vud h wd w hu pc h U.S. whu y fc v ubp d h hh-yd , hy w cud buy PMBS h—huh d AAA— d cv yd. I h wd, hw Fu 2, v hu pc—AH pd h GSE,h dc FHA d dd, HUD’ pu ducd udwdd bk, d CRA qu ud bk—by cu h wh h bubb, cd h wdwd dd ubp PMBS. T, d-2007, h bubb b d, wh cphccquc.

46 Id M Fc, Te 2009 Mortgage Market Statistical Annual—Volume II , MBS db.




2. he Defaults Begin

T b uy hw h d h hu bubb d hfc c w cd h ppd y h FDIC ch Sh Bdvd h FCIC Spb 2 h:

S d 2007, b fc k b xpc u liquiditychallenges d y cc bu U.S. cd quy. Ahome prices ell , cy d ubp d non-traditional mortgage loans began to deault at record rates. T dvp d growing concerns buh vu fc p -bckd cu d d dvv

u hd by j fc u h U.S. d ud h wd.T di culty in determining the value -d d, h, hbalance-sheet strength bk d -bk fc u uy d h u bc wary o lending h, v h-b.47 [ph uppd]

A h p wh hppd Ch B’ uccc: () d 2007, h k b xpc qudy chbcu cc bu h cd quy NM; () hu pc ; NMb du cd ; () w d cu d h vu MBS,d hu h fc cd h u h hd h; d, (v) fy, cquc h ucy—pcy h u Lh—fcu wud d h. T ph was h fcc. T w dcu w hw hw ch h p pd bdw h fc y.

Markets Began to Experience Liquidity Challenges

udd h ch, cy duh

bw PMBS, h hd, d h MBS h w dbud by vc uch FHA/G M d h GSE (d jy “Ac” h c). A hw b 1, by 2008, h 27 NM h U.S.fc y w hd () wh , () MBS ud by h GSE, ud hd by v cy bk ud h CRA, () PMBS cuzd by pv f uch Cuywd. T 27 NM hd upd pcp bc h $4.5 , d h ppd by PMBS cd 7.8 wh updpcp bc ppxy $1.9 . A dquc ddu upd h U.S. fc y, h w d fc u huh h hd PMBS. Hw dd h hpp, dwh w pyd by v hu pcy?

Bh Acy MBS d PMBS p huh v h pcp d cvd h p h bck u cu; hdc bw h h wy hy pc v cd k—..,h pby h v h h h p b du.T Ac u pc u h cu ud by p hy h y c. Bcu h Ac’ pcvd v

47 Sh C. B, “Sycy Ip Iu d h Iu ‘-B--F,’” y h FCIC, Spb 2, 2010, p.3.




bck, h cu d cdd b AAA.PMBS y cfc d ubd y kw “ch”

pvd v h p wh d uc h hy w u bcu du. I h ch y, d c cu ud by h p. T h c cv py pcp d h h p ubdd h h h c, h h up c ky cv py v h du h h p.

Tuh h ch, ppxy 90 pc u PMBScud b d AAA AA, v h udy NM h hv hh dqucy h p . I hy, xp, h hc p NM , y, fv pc, h h w b bbdby h pc h cu hd wh h c d w hAAA AA. O cu, h h cpd—xcy wh

hppd h c bubb b d—hy w ch h hhc d uby duc h vu.48 I c whh, 2007 2008, dquc d du hd cuy cud ch h AAAch PMBS, bu h whch dquc d du NMw ccu huhu h fc y w hh h uch w dc pby—bvuy cc v.

T h v PMBS d v-bckd Acy MBShd d xpc wh h bubb b d. T wh vd Acy MBS dd u (h U.S. v h hu pcd v Acy MBS), wh h wh vd PMBS w xpd h h udy w h hy hd vd h AAA d AA c. Ev ch hd cuy b ud,h hd PMBS wud hp dc h k vu h hd

v—hckd by h ub du —d h -bckd k. S wh w k h direct c u hfc cd vu fc u h fc c w hudk y h PMBS, h MBS ud by h Ac.

I dd, h du d dqucy h udy hPMBS w hh h h hd ud by hAc. My h whch bckd h PMBS w h -ddubp (h , d by ubp d xpcy ubp bw)d w cfd h w-p c b 3. I p, h b-p chcc h NM hd ud by h Ac wdu h c h h Ac w buy cc pup— kpf—bu y v qu uch h AH . Ty dd w d h hh-yd d hu ky h bckd

h PMBS, bcu hy dd d hh yd d h MBS. Idd, bcu h w c ud, h Ac cud py hNM hy buh d hu cud cqu h “b h w.”

48 A huh dcp h ch y, d y d bu vu hd pc ch, cd Gy B. G, Slapped By the Invisible Hand: Te Panic o 2007, Oxd Uvy P, 2010, pp. 82-113.




PMBS are Connected to All Other NMs Trough Housing Prices

Bu h d h y h u h PMBS w pb h fc c. I , kd h huhhu pc, d hu pc u hhy v dquc ddu . T chcc h p h cuzd . I cd cd hd du h b h c h cd cd hd, bu hw du hu cu h c h vu h h vcy d hu h quy h h.

Accdy, h PMBS w y ccd—huh hupc— h NM cuzd by h Ac. Bcu h w y NM hd cuzd by h Ac ( b 1), h upcddub—v c wh hy hd w v dqucy ddu h h NM h bckd h PMBS—w h j uc dwwdpu hu pc huhu h Ud S. Wk hupc, u, cud du, bh NM dh pcu NM h w h c PMBS. I h wd, h NMudy h PMBS w wkd by h dquc d du huch ub hd ud MBS by h Ac.

I y, h, h h PMBS w uch hh h hy wudhv b h v’ hu pc hd buh b 19 h NM h w upcdd ub. T u dv dwhu pc by 30 pc-- upcdd dc—whch upd h h PMBS.

Fy, h ud h h v dcd h hu k puu c pc d h hu bubb d xdd .

T hu bubb w, h k h hy c; d cy y fd wy kp hy py dw whbw buy xpv hu. Wh h bubb w w, hk h w bud wh w bcud. Bw wh wud hwhv dud h , b d h bubb, w b u h h pc fc, w . Wh dqucy vy w, v dd hv x h k,d h cu w ud wd h bubb xd upcdd 10 y. T u bd h PMBS k w u z d hu hv cu c wh fy cpd. I h v pc h pvdd cu uc ud h bubbhd b puud, dubu h h wud hv b PMBS ky h h dvpd, h—wh h hu bubb

cpd—h fc u wud hv b .

PMBS, as Securities, are Vulnerable to Investor Sentiment

I dd h k h Ac’ NM huh hu pc, PMBSw pcuy vub ch v bu .T c h h udy h PMBS w hd cuzd w p h c. T y h ppuy




cuz. B 2002, xp, h B upvdd h hd h MBS—puby bcu hup qudy cpd wh —qud bk hd y 1.6 pc k-bd cp, wh wh qud k-bd cpbck u pc. T d MBS, cud PMBS, uch xpv hd h wh . I dd, cuzd cud b dd y, d ud dy uc qudy huhpuch .

Hwv, h bf cuzd dwh c k cd pv. I hu vu dc, wh czd y wy bk fc d w b czd v wy h k. PMBS, hwv, vub w h wh hd bk bc h. F, bcu hy y dd, PMBS vu c b

qucky d dvy cd by v bu h udy h wh h pcp u. PMBS kd b h, bcu PMBS p d h. I v bvh dc vu, hy ub duxpcd ub du d dquc, hy y bd h k PMBS, cu h PMBS pc v pcpuy.

F xp, h bk Slapped by the Invisible Hand , P Gy G Y h h ABX dx, y pubhd 2006, h f v v pcu hw h w h vu cd up PMBSp. T dx hwd py dc vu, whch cud y v whdw h k. G bvd: “I vw h ABX dc vhh ukw , y, h d vw h ubp wwh fcy …I c whh h hu bubb w bu by

h by h h ubp hu k whh hu pc w dw d h pc h w d d vd by h ABXdc”49

Whv h udy , hw Fu 3, h bxcy wh hppd h fc c. T u w ch h MBSk v d wh kd k j c .

49 G, Slapped by the Invisible Hand , 41, pp.121-123.




Fu 3. T MBS k c h bubb’ d

Suc: Tp Ru Db Cp Mk Rvw, Fuh Qu 2008, vb hp://hu.c/pduc_vc/fc/u_b/db_quy/ (ccd Juy 30, 2009).

T dc hu vu hd pud dv c h qudy fc u h w xpd PMBS. A d bv, hbf hd PMBS, pcy h wh AAA , w h hy wdy kb. A uch, hy w cdd ud d cu v,cd bc h p d ub v c h fc huh puch , “p.” I p c, bw cuy d wh p puch pch pvd h d wh u ppp cud . T du h cupy du h c c b d. Accdy, h c pu hh quy d qudy, uch vu bh cp d qudy pup, v h c h cuy ud . T wh hppd AAA-d PMBS hupc f vd d h b 2007, d dqucd hd xpcd. A dcud uy bw, wh AAA-d PMBS bc ukb hy h vu qudy pup,k d cu pb y fc u ud hvu h c p. T w h liquidity challenge whch

Ch B d h y.T -u B S Mch 2008 w xc xp

hw h uxpcd cp h PMBS k cud cu ub qudy by fc u, d uy by uvv h u k cfdc. T FCIC ’ vw h qudy pb B S hwd h h h PMBS k w h v hw cpp B, bcu d j p h f’ qudy




p—AAA-d PMBS— uu uc p fc. Accd hC ’ Py Ivv Rp B, ppd h My 5 d 6, 2010, 97.4 pc B’ h ud w cud dy 2.6 pc ucud. “A Juy 11, 2008,” h FCIC pd,“$45.9 b B S’ p c w cpd cy (F dFdd) -d cu, $23.7 b w -cy cuzd bckd cu [.., PMBS], d $19 b w wh .” 50 TAcy MBS w ucd by h cp h PMBS k, d cud bud ud.

Tu, bu 27 pc B’ dy vb uc udcd PMBS h bc uub p fc wh h PMBS kdppd. T h uc qudy pu h f u jpdy;u wp h k bu B’ cd, d c b whdwud. B’ c d h C h h f w pfb f 2008

qu—h qu whch d; cy hy d h C’ h hy hd vd B’ h ud cc pp MBSbcu hy bvd h c-bckd ud wud b b. I hwk b Mch 10, 2008, ccd h FCIC p, B hd v$18 b ch v, bu by Mch 13 h qudy p hd $2b.51 I w c h B—v d pfb —cud uvv u h w ud by d ucy bu qudy d h pby vcy.

Phcy, hud b d h h C’ cud Bbcu h C’ jy ppy bvd h h bu d v bk, whch d vy hh v d p h h fc, w hy ub. T d cu B w huh bvdc h c. Cy, h fv dpd v bk—B, Lh

Bh, M Lych, M Sy d Gd Sch—w bdy dd h fc c. Oy w h dpd f, d h w w ud bk hd cp by h Fd Rv. Nvh, c h h v bk d y w h h uch hvy ud cc bk— F d Fdd whch w ud y h h v bk bu y bk. Tv bk dd p h cd by h dw dh ubqu fc c, bu h dd ub ud bk—IdyMc, Wh Muu (WMu) d Wchv, h —hw uch hvy ud d, dd, d ud dp dhd cc h Fd’ dcu wdw hy dd cy ud dwh u. T vw h C jy, h v bk— p h -cd “hdw bk y”—w pc cbu h fc

c, pcd h . Ty b cfd cbu h fc c bu vc h pc h ud h hu bubbd h PMBS k cpd.

B w dw bcu h dquc d u upcddy ub NM cud h cp h PMBS k; h dyd h

50 FCIC, “Ivv Fd B S (Py D),” Ap 29, 2010, p.16.

51 Id., p.45.




k h PMBS py cud b d yh bu d pc.T by fc u qud h PMBS yh k vu hd d cquc, pcy ud k--k ccuu, d w h cux h c. I c, wh c —vv $2 —c b cd “xc ” h d, d hd bw dw uby h bc h fc u udh wd. Ahuh h d fc u k wk h hy cuy w, h PMBS hy hd, dp b ukb h p, w y c w ch c xpcd . Id w dc vu—whch wud hv ccud wh w hd bk bc hd duy dd quy—h kby h cucud ch vu.

T C jy dd dcu h fcc k--k ccu p. T w u p, v h vw y

h ccu pc pyd p h fc c. My c hv ud h h u p ch bc hducd h GAAP quy fc u d, h, h cpp, k h pp fcy wk h hy cuy w vwd h b h ch w hy w cv.53

T v pc h b wh ucpd d upcdd d pp NM y d h PMBS p w pd fc u hv; v w u whch h u cud uvv v -d . T pc wucccy dcbd y vu k--k ccu h fc c ud by h Iu I Fc, z h wd’ bk d fc f:

[O]-dc w-dw sound qud ud h cu

p -vu ccu dvy c k , ud uh w-dw, c d cp pc dwwd ph y d -c f- , d dbz, p-cycc dbck c T d dbck c w qudy pb d cbu h cv qudy pb vcy pb.54 [ph h]

A udy pd h c h fc uv. I Juy 2009, Nu Rub d E P-Cp d hk--k MBS bckd by bh p d NM. T w hy v $1 , whch U.S. bk d v bkw d hv $318 b k--k b.55

T wud b dc w zd. I 2008, h U.S.bk y hd $10 ; h fv v bk hd

53 FCIC D S Rp, “T R Accu Du h Fc C,” p.16.

54 Iu I Fc, “IIF Bd Dc - Dcu Mdu Vu Iqud Mk,” Ap 7, 2008, p.1.

55 Nu Rub d E P-Cb, “ $3.6 Pjcd L d Scu L U.S. $1.8 Whch Bby U.S. Bk/Bk,” RGE Monitor , Juy 2009, p.8.




$4 .56 I w u h h bk hd v bu15--1 2008 d h v bk bu 30--1, h wud h hquy cp p h bk duy wh wud b bu $650b d h ub h v bk wud b bu $130 b, $780 b. Ud h ccuc, h cp h PMBSk ducd h cp p U.S. bk d v bk by ppxy 41 pc k--k b. T d h y cu w ud, y h h ccd h hv b wdw cud b d h pc whch hy w pvuy cd hf’ bc h.

I dd, Rub d P-Cp d h U.S. ccd v bk ud uh k--k $225 b ucuzd ubp d A-A .57 Ty d h k--k fc u ud h U.S. wud b bu 40 pc

U.S. , h w ky b j c bk d h fcu ud h wd—dpd, cu, h cp p h h PMBS k ppd uc. I w y d hw hk--k c h cp h PMBS k h U.S. fcu, bu c b ud h hy ud pp h hd PMBS.

L h ud wud cy b uh—wh cbdwh h cu d d — c qu h by ub bk, v bk d hfc u h U.S. d ud h wd. Hwv, h w h c h xcbd h dv c h k PMBS.Ahuh ccu u dd qu PMBS b w dw, vd cup dd kw whch fc u w hd h

wk d hw uch h wud hv b w dw v. Whv h u, wud duc h cp p whv d cup w xu bu h by. T w h balancesheet eect h w h hd Ch B’ uy.

uz, h, h w h p huh whch hv’ hu pc d —huh PMBS— h fc u: () h 19 NM cqud ud by hAc w j cbu h wh h bubb d x ; () h wh h bubb uppd h h wud dy hv buh h dvp NM-bckd PMBS h; () cp NM dv ubp d uh u h k cuv fd hh-yd cuz, pcy wh h dd pp b pduc cu wh h k; (v) wh h bubb fy bu, h

upcdd ub dquc d du NM—h jy whch w hd ud by h Ac—cud v

56 hy F. Gh, “Rduc Syc Rk Dyc Fc Sy,” Rk hEcc Cub Nw Yk, Ju 9, 2008, vb hp://www.y.b./wv/pch/2008/080609.h.

57 Nu Rub d E P-Cb, “ $3.6 Pjcd L d ScuL,” p.7.




h PMBS k, duc h qudy h fc u h hdh PMBS; d (v) k--k ccu qud h u wdw h vu h PMBS hy hd, w h h -d ,duc h cp p d uh qu bu h by d vcy.

Government Actions Create a Panic

M h y h ph, h fc c 2008 b d-hd v d cd pc. I h cc udy, Manias, Panicsand Crashes: A History o Financial Crises, Ch Kdb d Rb Abk dc bw cu d px cu pc: “Causaremota y c h xp cd d pcu, wh causa proxima cd h p h cfdc h y d duc v cd, ck, , b xch, py d ch y hd.”58 I h fc pc 2008, by ch h cu w h bud-up NM h fc y, py— I hv hw h y— u v hu pcy. Tupcdd c wk d ky h fc y up c kd. T v h ud p c u-ddpc—h px cu h pc—w h v’ c: hcu B S Mch 2008 d h ubqu u cu LhBh x h . I u c h pubc, h w h pcy , d h h jud h d hv y b uy xpd.

T uh by h cu B w h fcu—d pcy h h B—wud b cud. T

hzd ducd by h c pby chd h p LhBh d vy h f h wd’ fc y. F h wd, () h cc d cp bc cc; h khd v bu wud u cd, h w d du hhhd y uh by dd cp; () f uch Lh,h h hv b vd huh cqu by f u h cp by c v, dv hd b wh p cqu;() h p cqu hv wd h U.S. v pck up h c, hd wh B— h v c Lh’ c;d (v) h Rv Fud, y k uu ud, ppy uh Lh wud b cud, dcdd h hvy dcud Lhcc pp hd; d, wh dv u h y kud duy, wd b bd u h up h Lh wud b

vd.Bu Lh w vd, d cd w bd u. A

wh k--k U.S. fc f d qu buwhch fc u w v ub, h d Lhw j hck. I vud h xpc bu v

58 Ch P. Kdb d Rb Ab, Manias, Panics, and Crashes: A History o Financial Crises,5h d, Jh Wy & S, Ic., 2005, p.104.




pc h k pcp hd dvpd h B cu. Wh cy bu wh w wh w wk, h w hd uh U.S. v cu. Bk—d h h cup wud w u h v h cp cu wud dw cd—b hd ch. Bk wud’ d h bk, v vh.A Ch B ud, h was h fc c. Evyh h wpy c up h .

T y y h pcp cu h fc c quy h h upcdd ub NM h w buh h U.S. fck by v hu pcy. T wk d hh k hpd bud h bubb, d wh h bubb dd hy dud upcddub. T hd h PMBS h w hd by fc u h U.S. d ud h wd, p bh h qudy d h ppby.

T ccuu 27 ubp d A-A w d v, v h u j c uch b fc bc xcvy w . Id, h d h bubb whch hy cbud w h dc cquc h ud: U.S.v hu pcy, whch—d by HUD v w d—dby ducd udw dd h pp cudbuy h. Wh h pc w , vy w pd. Hwhp h U.S. cuy w h hh v v cdd. Bu h u w fc cph whch h U.S. h cvd.



485

III. HE U.S. GOVERNMEN’S ROLE

IN FOSERING HE GROWH OFHE NM MARKE

T pcd c h d dcbd h dh w d h fc y by h upcdd ub du ddquc h ccud h 27 NM h w p h 2008. Gv h d hy cud, h p qu bu hfc c why y w quy w cd. Ah wy h qu k why dd dcd uby b d du h 1997-2007 bubb, w y NM b cd.T v d upcdd ch udw dd hd hv

cu— c h w p du h 1990 d h h w p y pd. P III dd h ud qu.

T cv xp h fc c h v by FdCh Bk h pch Mhu C qud h u P II:

Sv w bd c b bfc h cuy h cv h wv h w. Uuy, h w wy h c h Ud Sd h cu. Financial institutions reacted to the surplus o available unds by competing aggressively or borrowers, and, in the years leading up to the crisis,credit to both households and businesses became relatively cheap and easy to obtain. Op cquc w hu b h Ud S, b h wud p by pd xp d. Unortunately, much o this lending was poorly done, involving, or example, little or no down payment by the

borrower or insu cient consideration by the lender o the borrower’s ability to make themonthly payments. Ld y hv bc c bcu hy, k y pp h , xpcd h hu pc wud cu --hby wbw bud up quy h h--d h cd wud y vb, h bw wud b b fc cy. Regulators did not do enough to prevent poor lending, in part because many o the worst loans were madeby rms subject to little or no ederal regulation. [Eph uppd]59

I h wd, h qudy h wd fc k cud U.S. bk cp bw by w h udw dd d h . Ld bc c. Ru d. Uud d bd . O h k: pub h bk wud cp bw by w h dd? M —whhS&L, cc bk, bk uud bk—hv b

cp 100 y. T cp vvd h w dh bf p bw. I dd , hwv, y u

59 Spch Mhd C Ap 14, 2009.




vv h wk udw dd. T dd—wh dup h d U.S. —w y 15 30 y z hbuy wh cud pvd dwpy 10--20 pc d hdd cd cd, jb d dy c. Bcu h quy, h w kw p .

T w ubp d ubp d, bu h y 1990ubp d w y ch py h d pp whcud d ; h ub hy d wvy d b hh h cp hk du. I dd, bk d h d FHA uc wh w dwpy, pd cd d hh db . U h1990, h NM w v h c h ub ud. T h w udw dd w y ud p. Lw dd wud u wh h dud,

d vy w d wd hd uch . I dd, F dFdd w h buy dd c h Ud S, dhy w cvv h ppch. U d d w uky h F Fdd h cdy k buycud b ud .

T c . I yu pduc pduc—whh ’ huhd c, ub, —pp cz h ck quy d yu u bu. T w h xpc wh ,whch bc wk d k h 1990 d 2000 pd. Why dd hhpp?

I p, h C jy d u h cd h quy . Much d h jy’ p h -cd “ dbu” d, wh uppd

c bu h quy h bcu hy wud vuy b d .T , d, h “k h .” T v k pquy h , y h bu ch h ubqu p h cuz pc.

T hy u h k upd dw. M cud k h w quy hy wd, bu hy wud’ d u h w buyer . T qu, h, why h w buy d h, u u, h k why udw dd, b h y 1990, dd bdy. AP Rhu Rj Fault Lines, “[A] bk c kw h u h w w buy ubp -bckd cu whuk y qu, hy uhd whu chck hbw’ cdwh, d cd quy dd. Bu wh, h

pb w hdd by w hu pc d w du—y cdkd h pb cud by y cd—u hu pc ppd dh d du bu h.”60

Wh w h buy? b 1, p h ub NM ud Ju 30, 2008, dfd v c d pv z qudby h v cqu, hd cuz NM pb w-hd

60 Rhu G. Rj, Fault Lines, p.44.




h , bu 19 . T b df h pv c h cuz h -hd, bu 7.8 . I h wd, w k h buy h NM h w b cd by h c v, h v’ pc wud b h ky cup.T pv c cy pyd , bu w ubd . Mv,wh h pv c dd w pd dd—h’ wh h pv cd—bu h v’ vvd db pcy, y d. O w v, cd dd h wud hw hv bh.

T d dd dd not ccu—cy hC jy’ pp vw—bcu bk d h uddy d k dfc ; w bcu u c u h v. T cd hw ubuuy h v ud FHA, F d Fdd, bk d ud bk kd

competing buy. A h dd NM d vu vqu. F d Fdd w ubjc cy dbhu qu; FHA w kd wh u w-c bwh wud b d u ud; bk d S&L w qud by CRA hw h hy w k h up bw; bk wh d up h HUD B Pcc Iv d h Cd’ N Hwhp Sy w qud k h kd . Pf hd h d wh h v h f; hy w pd v dc. Ud h ccuc, hudb up h udw dd dcd, h zcbd cqu h w quy .

1. HUD’s Central Role

I y b h Hu Fc Svc C Ap 14,2010, Shu Dv, Scy Hu d Ub Dvp, d c h GSE: “S h k h dc [bw 2004 d 2006] u [] ch dd, h GSE d h dc wd h cu p d b ch h -p k, -d udw d k dd h wy. T wudb u dc h y pvd du h cp hv–bu uy h Ac xpy.”

E, “Rp C h R Cu h FcuC,” Juy 2010, HUD dcd “T u fc ub h GSEh d h b pcd cvhp by h Fd vpvd h c h h GSE w, dd, vxpd

uduy ky v. Hwv, the evidence suggests that the GSEs’ decisions to purchase or guarantee non-prime loans was motivated much more byeorts to chase market share and prots than by the need to satisy ederal regulators.”61 [ph uppd]

F-p Wh dc wh pb ccu, d

61 Rp C h R Cu h Fcu C , Juy 2010, p.x, hp://www.hudu./p/pubc/hf/cu_09.h.




c d dvdu cy y fd cp h wbd dc, bu HUD’ b F d Fdd h dc udw dd w dd u pby.C h 2010 qud bv wh h by HUD 2000,wh w fcy c F d Fdd’ db hu :

Lw-c d y hv d j cc h k h 1990. A vy hv ccud h ,cud pvd hu dby, hcd c h Cuy Rv Ac, more fexible mortgage underwriting , d ppd-up c h F Hu Ac. But most industry observers believe that one actor behind these gains has been the improved perormance o Fannie Mae and Freddie Mac under HUD’saordable lending goals. HUD’s recent increases in the goals or 2001-03 will encouragethe GSEs to urther step up their support or aordable lending .62 [ph uppd]

O h 2004, wh HUD w c h db

hu F d Fdd:M Ac wh h pc cd wh c h uh udw qu h p k uch dqu c dcu, d dwpy ch v, hd k ch u fc h cv w, y ubp d cc fc. I the GSEs reach deeper into thesubprime market, more borrowers will benet rom the advantages that greater stabilityand standardization create.63[ph uppd]

O, fy, h 2005 p cd by HUD:

M b fc h cbud h c dd hu. Du h 1990, d hv b encouraged by HUD and banking regulators c d w-c d y huhd. TCuy Rv Ac (CRA), H M Dcu Ac (HMDA),

v-pd p (GSE) hu d d whv y cud bk d d k w-cd y bw. Sometimes these borrowers are higher risk, with blemished credit histories and high debt or simply little savings or a down payment. Lenders haveresponded with low down payment loan products and automated underwriting, whichhas allowed them to more careully determine the risk o the loan.64 [ph uppd]

Dp h c by HUD dy w hwh ubp d h hh k d, h —ddub—vdc h, b h y 1990, HUD d uy uccu w udw dd vy h k wh HUD hd cud b uc. Wh upp c, h pcy w uchd h C d d xdd h d h Buh d. I vvd FHA, whch w ud

h dc c HUD; F M d Fdd Mc, whch w ubjc HUD’ db hu u; d h bk duy, whch—wh ubjc HUD’ judc—ppy d puu HUD’

62 Iu B: HUD’ Adb Hu G F M d Fdd Mc, p.5.63 F Ru, hp://dy.p.v/dy/pk/FR-2004-11-02/pd/04-24101.pd.

64 HUD PDR, My 2005, HUD Cc C-OPC-21895, k Od CHI-0007, “Rc Hu Pcd d Hwhp Adby”, p.85.




pc u h hy wud b buh ud h Cuy RvAc huh .65 I dd, huh ubjc HUD’ judc,h w h CRA u h bc cv 1995 d pc whch cuy up cud b c ub u CRA-quy d h ubp bw wh bkw ppy ppv.66

By 2004, HUD bvd hd chvd h “vu” w k :

Ov h p y, h h b ‘vu db d’ h hxdd hwhp ppu hcy udvd huhd.F M d Fdd Mc hv b ub p h ‘vu db d’. During the mid-to-late 1990s, they added fexibility to their underwriting guidelines, introduced new low-downpayment products, d wkd xpd h u ud udw vu h cdwh ppc. HMDA d u h h duy d GSE v ch w cd udvd bw. Between 1993 and 2003, conventional

loans to low income and minority amilies increased at much aster rates than loans toupper-income and nonminority amilies.67[ph uppd]

T ud u b pcy. By 2010, v h upp db hu cd by HUD hd czd h .I vw Ly Kudw’ CNBC v p Auu,Rpv By Fk (D-M.)—h ch h Hu Fc SvcC d pvuy h c dvc dbhu—ccdd h h hd d: “I hp by x y w’ hv bhdF d Fdd . . . w k puh w-c pp hu hy cud’ d d cud’ y hd c hy hd .” H hddd, “I hd b u bu F d Fdd.”68

2. he Decline of MortgageUnderwriting Standards

B h c h GSE Ac 1992, d HUD’ dp pcy h duc udw dd, h GSE wd cvvudw pcc. F xp, d vw by F M 25,804 Ocb 1988 Juy 1992, v 78 pc hd LV 80pc , wh y 5.75 pc hd LV 91 95 pc.69 Hhk d w cfd py FHA (whch w cd by HUD) dpczd ubp d wh d h hy d FHA.Wh cud h cvv dd dc? T C jy,

65 Sv Cch, “F-d pu bud,” ABA Banking Journal , v. 86, 1994, hp://www.qu.

c/Sch.q?dcId=5001707340.66 S NCRC, CRA Commitments, 2007.

67 Federal Register ,v. 69, N. 211, Nvb 2, 2004, Ru d Ru, p.63585, hp://dy.p.v/dy/pk/FR-2004-11-02/pd/04-24101.pd .

68 Ly Kudw, “By Fk C H h Fc,” GOPUSA, Auu 23, 2010, vb www.pu.c/cy/2010/08/kudw-by-k-c-h--h-c.php#xzz0zdCWpCY (ccd Spb 20, 2010).

69 Dcu uh’ f.




ch Ch Bk, bv h h pu w cp h bk, pby , d h d pf. Tjy’ p h xp.

Hwv, h d cuy fd h uc h duc udw dd F d Fdd, h whhy w h buy. HUD d c uu h pcy—d k cd vb w-c bw—w pcfcy intended duc udw dd. T GSE Ac bd HUD pu F dFdd cp wh FHA, d vc v, c wh bc c w dd. A h F M Fud d 2000 p,“FHA cud h h Cuywd’ [ubp d]cvy, u F M d Fdd Mc b ccp wh hh LV[--vu ] d udw xb.”70

Ud h GSE Ac, h HUD Scy w uhzd bh db

hu F d Fdd. C qud h h cud w d d c d pc db (dcud bw), bh whch cud b djud h uu. A h c h cy w cd bh h w hu d d “h by h p [F d Fdd] d h duy k cdvb w-d d-c .” T Ac bhd db hu 30 pc h w-y pd b Juy 1,1993. Ud h qu, 30 pc h GSE’ puch hd b db hu , dfd bw bw h AMI.71

Fuh, h Ac bhd “pc db” h“uddd d , d db , w-c w-c d vy w-c .” T cy w dfd w: “() 45pc h b w-c wh v cu c whch

h d c d xcd 80 pc h d c; d() 55 pc h b vy w c ,” whch w dfd 60 pc AMI.72 Ahuh h GSE Ac y qud h hGSE pd pc db “ h 1 pc h du h puch by h [GSE] h pvu y,” HUD dh qu uby y. Uy, bc h d cudb hu AH bud F d Fdd .

Fy, h GSE w dcd : “(A) py d khu cd vb wh w-c d y ; d (B) ud dpy u h b ud h Cuy Rv Ac 1977.”73 T w b h CRA d c hquy h c.

C d c h c h w c qu

h hh quy udw ud h . I dd by dc Fd Fdd “x—

70 F M Fud, “Mk Nw Mk: C Sudy Cuywd H L,” 2000,hp://c.kwdpx./kp2/p/pd/p_wk_cuywd.pd.

71 GSE Ac, Sc 1332.

72 Id., Sc 1333.

73 Id., Sc 1335.




(1) T x whch h udw ud pv hb h puch cuz hu xd-u, ub c, d

pdy y hbhd d hu w-d d-c ;

(2) T dd pyd by pv u d h x whchuch dd hb h puch d cuz by h p dcbd pph (1); d

(3) T pc p udw dd h—(A) bh dwpy qu 5 pc ;(B) w h u ch hd uc dwpy; d(C) ppv bw wh hv cd hy dquc h bwc d cy cd hy h 12-h pdd h d h ppc h .”74

I cud fd cd p by F d Fdd qud ud

h c h c, bu wud hv b y c bh cp, d HUD, wh C wd k h ud. Pv udwdd w hb fc w d d c (LMI), d wud hv b uby xd d h h Ac. Whv h v, HUD u u h dwpyqu w uby ducd (vuy hy chd z) d pcd hy bc uch p u wh w d(p ubp bc c).

U 1995, HUD cd h py AH y pu pcby h GSE Ac. Wh h xcp h pc db qu, whchw h p, h w bud. I h dy cu h bu, h GSE hv buh uh d bwbw h AMI quy h 30 pc AH . I 1995, hwv, HUD d

h LMI 40 pc, ppcb 1996, d 42 pc ubquy. I c F d Fdd, HUD’ p v h w Spc Adb (w d vy w c bw) 12 pc, whch cd 14 pc 1997. E fd w

vy w c bw (80 pc d 60 pc AMI, pcvy) h dd vv hh k wud pv d cu. A y Nvb 1995, v bh c h w d hh , F’ hd dy czd hF’ Cuy Hbuy P (CHBP), whch ud 97 pc--vu (LV) —.., 3 pc dwpy75—w hw fc u dqucy h xcdd F’ xpcd by 26pc y 1992, 93 pc 1993 d 57 pc 1994.76

I 1995, cu d udw dd d c hwhp, HUD ud pcy d “T NHwhp Sy: P h Ac D.” T Sy wppd by HUD, “ud h dc Scy Hy G. C, p

74 Id., Sc 1354().75 F M, “Op D wh F M’ Cuy Ld Pduc,” 1995, p.3.

76 F M, M Cd Pcy S Cd Pcy C, “CHBP Pc,”Nvb 14, 1995, p.1.




qu Pd C.”77 T f pph Chp 1 d: “Tpup h N Hwhp Sy chv - hh v hwhp Ac wh h x 6 y huh upcddcb pubc d pv hu duy z.”

T Sy pp h d h “duy pv d h wk up hp dvp h N HwhpSy” d d c h pup w c hwhp by duc dwpy: “Lending institutions, secondary market investors, mortgageinsurers, and other members o the partnership should work collaboratively to reducehomebuyer downpayment requirements. M fc wh hh --vu hud y b cd wh hcd hbuy cu d,wh vb, upp uc dwpy c.”78 Accd HUD uy, h pup h Sy w k fc “ vb,db, d xb.”79 [ph uppd] I cud:

T by (h pcvd) y yu quy wdy czd vy u b hwhp. TN Hwhp Sy c bh v d h duy ub v dd :

Cu c c huh d u d chc dpcdu cc.

Reduce downpayment requirements and interest costs by making terms more fexible, pvd ubd w- d d-c , d ccv v hwhp.

Increase the availability o alternative nancing products in housing marketsthroughout the country.80 [ph uppd]

Rduc dwpy, h whch HUD pcuy

ccd puu AH d h N Hwhp Sy, pcy p wk udw dd. b 4, bw,bd p h 1990, hw h k hpbw dwpy d k. I pcuy ucv h wh w dwpy (.., hh LV) cbd wh w FICO c(ubp ) h xpcd dquc d du upd vd. F xp, wh wh FICO c bw 620 cbd wh dwpy fv pc, h k du 4.2 h wud b h dwpy w 25 pc.

77 HUD, “T N Hwhp Sy: P h Ac D,” vb hp://wb.chv./wb/20010106203500/www.hudu./pubc/ /hw/chp1.h.

78 Id., Chp 4, Ac 35.

79 T “xb” h pc wh HUD u . S 8 up.

80 HUD, Ub Pcy B N.2, Auu 1995, vb hp://www.hudu./pubc/x/hdb2.x.




b 4.81 Hh LV hc h k w FICO c

Cu 1 Cu 2 Cu 3 Cu 4 Cu 5 Cu 6Rw 1 FICO Sc ≤ 70% LV 71-80% LV 81-90% LV 91-95% LV R

Cu 5 Cu 3

Rw 2 < 620 1.0 4.8 11 20 4.2

Rw 3 620-679 0.5 2.3 5.3 9.4 4.1

Rw 4 680-720 0.2 1.0 2.3 4.1 4.1

Rw 5 > 720 0.1 0.4 0.9 1.6 4

Dp h bvu d, HUD w h dwpyqu pd by h pv c h ky h ucc y c h whp huh h “php” hd bhdwh h fc cuy: “T u bw quy p c quy. However, many low-income

amilies do not have access to su cient unds or a downpayment. While memberso the partnership have already made signicant strides in reducing this barrier tohome purchase, more must be done. I 1989 y 7 pc h wd wh h 10 pc dwpy. By Auu 1994, w dwpy hd cd 29 pc.”82 [ph uppd]

HUD’ pcy w hhy uccu chv h uh. I 1989,y 230 hbuy buh h wh dwpy 3 pc , bu by 2003 v buy w pvd dwpy h v,d by 2007 h ub w h h. T du c LVd CLV (f d cd cbd pduc w dwpy)ud HUD’ pc hw Fu 4. N h d (1992) wh HUD b hv uc v h dwpy h h GSE wud ccp.

T HUD’ AH w h F cd hh LV (w dwpy) d cy dcbd F p HUD cy Ab v Juy 10, 2003: “Ay h kd h b h whp d wh—h ck y dwpy…u w-dwpy d—b u 1994—h w cdby. I ky p u y vw-c d y bw.” T fu h ccpd h hwd h F’ h puch v 95 pc LV hd cd pc 1994 7.9 pc 2001.83

81 “Dcuc h Subp Dbc U Nw Idc Udw Quy d EccCd: A F Lk,” by Ad, Cpzz, d V Od, ud hp://www.u.c/DcucSubpJuy2008.pd.

82 HUD’ “N Hwhp Sy – P h Ac D,” hp://wb.chv./wb/20010106203500/www.hudu./pubc/ /hw/chp1.h.

83 ”F M’ R Adb Hu Fc: Cc Wd Cp Mk d Ac’Hbuy,” P HUD A Scy Ab v, Juy 10, 2003.




Fur 4. Ed Prc o Ho Purch Volu wh LV or CLV >=97%(Iclud FHA d Covol Lo*)

d Cobd Forclour Sr R or Covol d Govr Lo

*F‘ prc o ho purch lo wh LV or CLV >=97% ud h proxy orcovol lo.Sourc: FHA 2009 Acurl Sudy, d HUD” Of c o Polcy Dvlop d Rrch - Prolo GSE Mor Purch 1999 d 2000, 2001-2004, d 2005-2007, d F’ 2007 10-K.Copld by Edwrd Po.

T clo rlohp bw low dowpy d dlquc ddul o or how Fur 5, whch copr h cr FHA 97prc (or rr) CLV or LV or o h cr h orclour r

r o ll lo publhd by h Mor Bkr Aoco.

Fur 5. Rlohp bw low dowpy d dlquc or dul o or

Sourc: MBA Nol Dlqucy Survy, FHA 2009 Acurl Sudy, d HUD s Of c o Polcy Dvlop d Rrch - Prol o GSE Mor Purch 1999 d 2000, 2001-2004, d 2005-2007, SMR’ “Pybck Mor Ld,” d F’ 2007 10-K. F ud hproxy o h covol rk. Copld by Edwrd Po.

’




I 1995, HUD ud h F d Fdd cud AH cd buy PMBS h w bckd by w-c bw.84 T pvdd ppuy ubp d c p ubp h wky b AH -ch. T w h d huh W S udw F d Fdd, whch bc h buy h hh k PMBSbw 2002 d 2005.85 T PMBS p w buh pf. A AdMz, F’ Ch Cd O c, d F CEO D Mudd 2005du, “ 2004 pv b [PMBS] vu w cy chvch y d d hu .”86 T pby h by c k PMBS bckd by NM F d Fdd bdW S—whch hd pvuy cud cuz p jub — dvp udw bu PMBS bd NM.

HUD puud h pc huhu h bc h Cd d h d G W. Buh. Uy, hy

wud d h dw 2007, v ub whw dwpy d h -d u uud h fcy. Bu Ju, 1995, h d HUD’ pc w czd. APd C d 1995 pch, “Ou hwhp y w ch xpy x d c. I w qu . I w dd d p w h Fd buuccy.”87 T h h hv c ccph whu w, h hpw h pv c. T d , hwv, w hv w d, h h xpy w uy b cd wh h c.

T x fc v h AH w d ud HUD Scy Adw Cu, d w j p. O Juy 29, 1999, HUD ud p wh h hd “Cu Auc Ac Pvd $2.4 M Adb Hu 28.1 M F.”88 T b:

“Hu d Ub Dvp Scy Adw Cu dy ucd pcy qu h ’ w hu fc cp buy $2.4 v h x 10 y pvd db hu bu28.1 w-d d-c .” T w wd by qu Pd C phz h pc h v: “Du h xd h y, y Ad h pu du ph phwhp d k hu db Ac…dy,h hwhp - hh, wh h 66 pc Ac w h h. dy, w k h fc p.”

T h pd u h h AH wud b uby d d h “[u]d h hh , F M d Fdd Mc w buy dd $488.3 b h w b ud pvd db hu 7 w-d d-c v h x 10 y. T

w d v d bv h $1.9

84 hp://www.whp.c/wp-dy/c/c/2008/06/09/AR2008060902626.h.

85 S F 32.

86 F M, , Ad Mz D Mudd, “RE: Pv Lb Scu,” Mch 2,2005.

87 W J. C, Rk h N Hwhp Sy, Ju 5, 1995.

88 HUD P R, HUD N. 99-131, Juy 29, 1999.




21.1 h wud hv b d h cu hd bd.” T d h “F M Ch Fk D. R

jd Cu h w cc whch Cu ucd h HUD c.R cd F M ch HUD’ cd Adb Hu.”

T pcy bhd h ub c h AH w xpd HUD’ dcu h u-k: “ uf h [h GSE Ac], h GSEhud d h duy u h cc cd d vb vy w-, w- d d-c d d udvd. HUD cz h, d h duy v , the GSEs will have to stretch to reach certain goals and close the gap between the secondary mortgagemarket and the primary mortgage market. Tis approach is consistent with Congress’ recognition that ‘the enterprises will need to stretch their eorts to achieve’ the goals.” 89 [ph uppd]

T w AH ucd 1999 w fy ud u Ocb2000. T pcfc w u d dv F d Fdd w d ch . T bc , LMI qu 42 pc, wd 50 pc, d h pc db w d 14 pc 20pc. A u, 75 pc h c w ccd h w-d vy-w c cy—wh h k w h . A HUD uzd h w u:90

F ch y 2001 huh 2003, h :

• Low- and moderate-income goal . A 50 pc h dw u fcd by ch GSE’ puch hud b wh c h d c (AMI), dfd d c h p p cuy. T cpd w 42 pc 1997-2000.

• Special aordable goal . A 20 pc h dw u fcd by chGSE’ puch hud b vy w-c (h whc h 60 pc AMI) w-c (h whc h 80 pc LMI) w-c . T cpd w 14 pc 1997-2000.

• Underserved areas goal. A 31 pc h dw u fcd by chGSE’ puch hud b u cd udvd . Rchby HUD d h h dd h w-c d hh-y cuc hv hh d d w , d h h b HUD’ df udvd . T cpd w 24 pc 1997-2000.

HUD’ w d AH qu dy ud h GSE CRA , ub p whch

w ky b -quy. T vd pch by F’ Vc Ch,J Gck, Ac Bk Ac cc Ocb 30,

89 hp://wb.cc.p.v/c-b/dc.c?db=2000_&dcd=p+65043-65092.

90 HUD, O c Pcy Dvp d Rch, Iu B N. 5, Juy 2001, p.3.




2000, ju HUD ucd h c h AH h GSE:

Yu CRA bu vy p u. Sc 1997, w hv d y $7 b pcy d CRA bu— wh dp k yu. Bu h juh b. B h dcd v, F M cd fc v$20 b pcy d CRA bu d v $500 b CRA bu

h…

W w yu CRA bcu hy hp u u hu … W w buy h yu p, pck h cu… W w puchCRA yu k h h p ... Yu c CRA u puch wh u CRA-dy pduc, k u 3 pcdw F 97. O w hv pc cuy d pduc wh xbudw d pc fc… Ou ppch “CRA yu wy”.91

T 50 pc v h w HUD u w u p. Fd Fdd hd ch b ch h pvu 42 pc, bu 50

pc w fc ch. A D Mudd d h C,F M’ u, HUD, pd v-hh hu hw vy d cu du y u CEO [2005-2008]. T HUD y pcd F M’ bu, d , uc, y,d p w ddcd fd wy h . HUD cdh vy v h p wh hy xcdd h 50% k,qu F M pc ph puch udvd. F M hd dv d uc u bu y HUD’ d ub.92

Mudd’ p c b ud wh p hc. A h 50 pc v, vy cqud h w -quy, F d Fdd hd cqu -quy . Ahuh bu 30 pc p wky b -quy y v (bcu hy w d bw

bw h ppcb AMI), p w . Subp d h NM w -ch, bu vy uch w -quy. Accdy, d 50 pc , h GSE hd puch v u -ch NM d cqu u c qu -quy .

Tu, p HUD 2004, F ud h 57pc LMI (whch w ud cd by HUD h ) wudhv cqu 151.5 pc ubp h h d cpuuh -quy .93 Mv, wh h pc db cy 20 pc 2004, h GSE hd cqu ub NM bw wh w bw 60 pc h AMI. T qu dvF d Fdd v uh k y ch h wud h ub.

91 J S. Gck, Rk Ac Bk Ac cc, Ocb 30, 2000. hp://wb.chv./wb/20011120061407/www..c/w/pch/pch_152.h.

92 D H. Mudd’ Rp h Qu Pd h FCIC’ Ju 3, 2010, , Aw Qu 6: Hw u w HUD’ db hu ud F M’ puch ubp d A-A ? W A-A “-ch”? W A-A pv hu?

93 F M, “Dcu HUD’ Ppd Hu G,” P h Dp Hu d Ub dvp, Ju 9, 2004.




M wh w h w ud h d, v pc h hu fc fd, bu vy d . I pp pubhd 2001,94 fc y Jh R czd h d ddhuh h dd cz hw y w ubjc h pb:

Ov h p dcd F M d Fdd Mc hv ducd qud dwpy h hy puch h cdy k. T quhv dcd 10% 5% 3% d h p w h F Mucd h wud w Fdd Mc’ c v h 0% dw py k. Ahuh hy buy w dw py , h u b ud wh ‘pv uc’ (PMI). O h wh PMI, vh c c c w b bwd huh ucud , ubd.T h y c h buy pu z d dw puch w hubu h h c fc h c c….

[I]t appears a large portion o the housing sector’s growth in the 1990’s came rom

the easing o the credit underwriting process….T vuu cyc chwhp du v h h p bc vcu cyc w h pc du cc cu.95[ph uppd]

T c h AH ccud 2004, wh HUD d hLMI 52 pc 2005, 53 pc 2006, 55 pc 2007 d 56pc 2008. A, h pc c h pc db cy uppd h LMI , pu ddd pu F d Fdd cqu dd ky NM. T cy cd 20 pc 27 pc v h pd. I h h ccpd h c, HUDdcd:

M Ac wh h pc cd wh c h uh udw qu h p k uch dqu c dcu, d dwpy ch v, h

d k ch u fc h cv w, y ubp d cc fc. I the GSEs reach deeper intothe subprime market , bw w bf h dv h by d ddz c.96 [ph uppd]

F dd dd ch dp h ubp k, cf Mch 2003 p HUD, “Hh c u dp FHAd ubp.”97Accd HUD d, u h AH F M’cqu -quy (whch w py ubp d A-A)cd () vy w c bw 5.2 pc h cqu 1993 12.2 pc 2007; () pc db bw 6.4 pc 1993 15.2 pc 2007; d () h d c bw(whch cud h h w c) 29.2 pc 1993 41.5 pc 2007.98

94 Jh R, “Hu h Nw Mu: A H Whu Equy Ju R Wh Db,”Ju, 2001, p.7, vb : hp://pp..c/3/pp.c?bc_d=1162456.

95 Id., p.29.

96 hp://dy.p.v/dy/pk/FR-2004-11-02/pd/04-24101.pd, p.63601.97 F M, “T HUD Hu G”, Mch 2003.

98 HUD, O c Pcy Dvp d Rch, Pf GSE M Puch, 1992-2000,2001-2004, d 2005-2007.




By 2004, F d Fdd w u cy d ubp h AH h h CEO, h w ccu hw, w bk k ubp pduc:

T p xcuv Fdd Mc d F M [Rchd Sy d FkR] d b bu h buy d bwy cdd h pvc p d h ch d. …F MCh d [CEO] Fk R d bk S Fcc hh cpy’ d-cu ‘d h b h ubp kd b h b h p k [h ubp k].’ H dp p d h, h d, ‘ h b k fc

vc.’… We have to push products and opportunities to people who have lesser credit quality,” h d.99 [ph uppd]

Accdy, by 2004, wh HUD pu w d uh AH c,F d Fdd w u vy vb uc h , cudubp , A-A d h puch PMBS. S bv, cudh C’ jy, hv cd h h GSE buh NM dPMBS pf—h h u dd F d Fdd h AH d h u hv b cqud bcu hy wpfb. Hwv, h by Ad Mz pd bv, d h d b 5 uhd h C by F M hw h h c NM—ubp (.., bw wh FICO c h 660),A-A d PMBS (cd PLS “Pv Lb Scu” h b)—ufd h AH ub h y d h pc hw bw.(Bdd ub xcdd h ppcb .) b 5 hw, fcy,h h du c F’ puch h NM cy wd hdu c h bw 1996 d 2008.

99 N M, “Lk Nw Cu,” Mortgage Banking , Dcb 1, 2004. I y b fch h ch Fdd Mc h , Ld Bd, dd d h 2000 p cc pd upp HUD’ w . R u hv h 1999 pd Scy Cud h pch h bk wh h w Te Wall Street Journal Auu3, 2010: “T c bu h fc cp F d Fdd py c d pubc cd. T cpy , h u d h uy hv d h h whchcppd h cp w cud by h puch wh w cd dd bw 2005d 2007. T cp xpcy chd h cd dd d k h W S b df k cd dd 2004.”




b 5.100 Nd M d h Adb Hu G

Y Lw & MdIc B G

Spc AdbB G

UdvdB G

A* G A* G A* G

C S <0 O

1996 38.08% 40 % .% 12% .0% 21%

1997 38.04% 42% 12.35% 14% .0% 24%

1998 37.72% 42% 11.76% 14% 9.7% 24%

1999 40.36% 42% .0% 14% 0.87% 24%

2000 .9% 42% 7.8% 14% .79% 24%

2001 45.98% 50% 17.90% 20% .9% 31%

2002 49.66% 50% 20.09% 20% 7.9% 31%

2003 49.18% 50% 19.38% 20% .% 31%

2004 .7% 50% .% 20% 7.% 31%

2005 .9% 52% .% 22% .8% 37%

2006 .% 53% .8% 23% .% 38%

2007 .7% 55% 24.76% 25% .% 38%

2008 55.24% 56% 25.50% 27% .9% 39%

A-A O

1999 8.8% 42% .7% 14% 7.% 24%

2000 40.61% 42% 8.7% 14% .0% 24%

2001 39.05% 50% 16.41% 20% 0.% 31%

2002 42.77% 50% 18.13% 20% 0.08% 31%

2003 42.42% 50% 16.81% 20% 7.% 31%

2004 44.13% 50% 18.56% 20% 0.08% 31%

2005 43.12% 52% 18.57% 22% .% 37%

2006 40.43% 53% 18.09% 23% .0% 38%

2007 39.02% 55% 17.29% 25% 0.9% 38%

2008 42.37% 56% 18.52% 27% .0% 39%

PLS B S

2003 .% 50% 19.57% 20% 7.09% 31%

2004 ̂

2005 50.95% 52% 19.86% 22% .% 37%

2006 0.% 53% .% 23% 0.% 38%

2007 52.96% 55% 19.21% 25% .% 38%

2008 51.42% 56% 17.68% 27% .% 39%

*% u fcd h qufd b .

^ N cudd hu c 2004

b 5 hw h dy ubp , A-A d PMBSbckd by ubp w wy u c h AH . F

100 F M, dk pducd FCIC, Ap 7, 2010. Tuhu h y, I hv dcud hGSE’ cpc wh h “Udvd B G,” whch cudd h b. T UdvdB G ppd y d vvd d d dc h h LMI d h Spc Adb G.




h , F dvpd pc c whch h f wvd u udw qu d upp wh hy w hh quy NM. T w pcp c w My Cuy M (MCM) d Expdd Appv (EA). I y c, hw c bd F h AH , bu h c uch hhdqucy h ccud hh quy NM hy cqud. Ah y pd d h AH cd, F hd cqu cub h c, d hw b 6 h cub xhbd c dqucy :

b 6.101 Hh Rk L Pducd Hh Dqucy R F M

G V L C S D R

2004 & P EA/MCM & Hu G 115,686 17.59%

2005 EA/MCM & Hu G 56,822 22.35%

2006 EA/MCM & Hu G 110,539 25.19%2007 EA/MCM & Hu G 224, 513 29.70%

Ju hw dp F d Fdd w h AH vdby F’ bhv 2004. A pd h American Banker My 13, 2005,“A Hu Fc Svc C p hd wh wk Tudy ccud F M d Fdd Mc v v y dubu c h db-hu …T p cdv c d by F ud whch w wd puch whu cu. F xp, d h Spb 2003,F buh h p buy up $12 b uy Wh Muu, Ic., $2 , h p d. Ud h, h GSE pd WMu puch h …’ T w h uy c v udk by F M d w cc FM ch h db-hu , h p d.”102

A c wh hppd h cd WMu’ 10-K 2003. Fdd hd d bu c wh WMu 2003,pd w WMu’ 10-K dd Dcb 31, 2003:

Oh c cd 2003 cpd wh 2002 py du

pd h Cpy [WMu] by h Fd H L M Cp(“FHLMC” Fdd Mc”). T Cpy cvd $100 udb duc h Cpy wp ppxy $6 b u-y 100% h bfc h h -bckdcu ud by Fdd Mc. Sc h Cpy h h u h cp h cu y, h Cpy h cvy d cv h . Accdy, h cu b ccud d pd . T c w udk by Fdd Mc d c uf

2003 db hu by h Dp Hu d UbDvp.

F d Fdd w bh py hd py h p -quy h h GSE cud u y h AH h y 2003. A h d h y, h hd

101 F M, “GSE Cd L,” p Hu Fc Svc C, Ap 16, 2010.

102 Rb Bckw, “w GSE Cu C H G, Rp Sy,” American Banker , My 13, 2005, p.1.




bu h cqu h . T c b dub, h, h y 2003, F d Fdd w ud uch pu fd h ubp h h hy dd h db hu b h hy w w py ub u wdw-d h p HUD.

3. he Affordable Housing Goals were the SoleReason hat the GSEs’ Acquired So Many NMs

Up h p, w hv h HUD’ pcy w duc udwdd d k cd dy vb w-cbw, d h F d Fdd y k h AH uy bu w w xdy h k u h hy h.Nvh, hv bc ccpd d qu—cud h C jy’ p—h F d Fdd buh

ub ubp d A-A bw 2004 d 2007 d cv h k h hy hd ubp d uch Cuywd W S, k pf. Ahuh h vdc whv hb—d d vdc h cy— h bc h ubyh, pd bk, b d h d h h d kd y.103

T u h d vy b. A d , HUD h cd—budy, h duc udw dd—h h GSE w “ch h p k” “ch k h dpf,” pcpy bw 2004 d 2007. T c, y ccpd, h h h xp pv d d h, bu c h HUDw py y vd w cupby u h AH ddh GSE’ udw dd v h 15 y pd bw 1992

d 2007. T C jy dpd v h d p, b h GSE’ h udw dd d p ck k y d v, w c cp. N HUD’ bu duc udwdd d k h C jy’ p, whch dy h d h h GSE’ udw dd w ducd by hd “w W S d h d [h] uh ’ d.”

T c pc h b F d Fdd’ vcy—d hhu ub w quy h U.S. fc y dy p h fc c— h f’ . Ty bv h v,pcuy HUD, pby. T GSE’ d py k—d w’ b ddd h—bu k k cp k

h w h hy cuy dd. Bcu h AH , F d

103 S, .., By Rhz, “G M RW!” Bailout Nation, Bailouts, Credit, Real Estate, Really,Really Bad Calls, My 13, 2010, hp://www.hz.c/b/2010/05/w-h-cu--h-cd-c/p/; D Bk, “NPR U h Rpubc Bv h F d Fdd Cudh Ch” Beat the Press Blog, C Ecc d Pcy Rch hp://www.cp./dx.php/b/b-h-p/p--u-h-pubc-bv-h--d-dd-cud-h-ch;Ch Duh, “R h C,” Frontline, Fb 17, 2009, hp://www.pb./wbh/p//dw/h/hwwh.h.




Fdd w j buy NM w b W S f d h ubpd wh c d h bu d h ubp PMBS k y fc wy. Mv, h GSE dd (dd, cud ) ppcby c h puch NM du h y 2005 d 2006, wh hy hd k h h PMBS u, Cuywd d h ubpd.

T w dcu dd ch h c bu h GSE’v u, d h d w hw h h y pub v hc w h cpy wh HUD’ AH .

Did the GSEs acquire NMs to “compete or market share” withWall Street or others?

T d h F d Fdd w wc h puch NM

bw 2004 d 2007, d ducd h udw dd hy cudcp k h wh W S h, w. A hw b 7,h GSE’ cqu ubp d h NM b h 1990, whhy f bc ubjc h AH . Rch hw h, cv h dd, h GSE b cqu hh --vu (LV) 1994, hy h c h GSE Ac d h p h AH , d by 2001—b h PMBS k chd $100 b u uc—h GSE hd dy cqud $700 b NM,cud v $400 b ubp .104 F w W S y ubp bw 2004 d 2007, h GSE hd bc h buy ubp d h NM y y b h PMBS kb dvp. Gv h c, wud b ccu y h W Sd h ubp d wh c d h PMBS k wd

h GSE ubp d. b 7 d hw y fc c h GSE’ cqu NM 2004 2007, d h u ubpPMBS hy cqud du h pd cuy dcd. T c whh c—ud bw—h h GSE dd k y pc cp k h du h y.

104 P, “Gv Hu Pc h Ld-up h Fc C: A Fc Sudy,” Ch52, p.148, hp://www../dcLb/Gv-Hu-Pc-Fc-C-P-102110.pd.




b 7.105 GSE Puch Subp d A-A

$ 997 998 999 000 00 00 00 00 00 00 007 997-007SubpPMBS

$3* $18* $18* $11* $16* $38 $82 $180 $169 $110 $62 $707

Subp**

$37 $83 $74 $65 $159 $206 $262 $144 $139 $138 $195 $1,502

A-A PMBS Uk. Uk, Uk. Uk. Uk. $18 $12 $30 $36 $43 $15 $154

A-A *** Uk. Uk, Uk. Uk. Uk. $66 $77 $64 $77 $157 $178 $619

Hh LV****

$32 $44 $62 $61 $84 $87 $159 $123 $126 $120 $226 $1,124

***** $72 $145 $154 $137 $259 $415 $592 $541 $547 $568 $676 $4,106

* puch PMBS 1997-2001 kw. Subp puch h y w dbd up h pc h ubp PMBS cud PMBS puch 2002 (57%).**L wh bw’ FICO <660.*** F d Fdd ud h vu db hu p d dvdu d vc

p (y cjuc wh h ud udw y c h c u h -1990) ppv wh A-A chcc. Hwv, hy y dd cy h A-A. Cfc A-A d h y-1990. T ukwub dd h hd hh db , ducd v, d cd qu,xpdd cbu, c. T vu h cudd.****L wh LV cbd LV >90% (v duy pcc, hcvy >=95%). D wh CLV.>90% uvb p 2003.Au 2003-2007 d up by 60% ccu h pc wh CLV >90%.T bd dcu by F d Fdd h h d 2007 h xpu wh LV CLV >90% w 50% d 75% pc pcvy hh hh xpu wh LV >90%. F p p. 128 2007 10-K h 15% bk hd cbd LV >90%. I O LV pc >90% (whu cuh pc y 2d uuy d) 9.9%. Fdd p p60 Q2:2008 10 Q h 14% p hd cbd LV >90%. I OLV pc>90% (whu cu y uu 2d) 8%. Wh F d Fdd puchd y hf , h hd h hh cdc du wh LV >90%.*****Sc y hv h chcc, hy y pp h cy. djud k h ccu.

T c h h GSE d h udw dd d cp pcfcy wh “W S” c b y dd—u hC jy d h wh hv d h cudCuywd (whch w bd C) h ubp d h “W S.” Au, hwv, h h C jy d hc hv b u h W S ppy h cc dv bk h p h fc k Nw Yk, h d hwh W S w fc pcp h ubp PMBS kbw 2004 d 2007 y b h d. T p fv py 2004 w ubp d Aqu ($55 b) d Cuywd ($40

b), wd by Lh Bh ($27 b), GMAC RFC ($26 b), dNw Cuy ($22 b). Oh h Lh, h W S f wcd huh h h p 25, bu w fc py up.

I 2005, h b y ubp uc, h fv d w h, d h W S u w $137 b, bu 27

105 Id.




pc h $508 b ud h y.106 I 2006, Lh hd dppd u h p fv d Cuywd hd k v h dhp h u,bu W S’ h hd fcy chd. By h dd 2007, hPMBS k hd dcd uch d h h k h ub w. Hwv, h y h GSE’ k h NM cdbcu hy hd cu buy NM—v huh h hd dud h bu— d cpy wh h AH . Accdy, F hdv d d dd cp wh up, h up w W S.

T x qu whh h GSE d h udw dd cp wh Cuywd, Aqu d h h ubp d whw h d py h PMBS k bw 2004 d 2007. A, hw cy b . T ubp PMBS k w vy u2002, wh h f xcdd $100 b d chd $134 b

ubp PMBS uc.107

Y, b 7 hw h 2002 h GSE buh$206 b ubp , h h u cuzd by hubp d d h cbd h y.

T dcu dcu h w w cu xcuvy F M. T C ccd v F d w F h h C cvd h cp dcu.

By h y 2000, Cuywd hd uccdd c dy dbu h cudd , pck, u dudw NM huh PMBS. Oh ubp d, d bv, w j u, bu hy d h PMBS huh W S f h wuc udw.

T ucc Cuywd d h ubp d dbu

NM huh PMBS w ub F w . F, Cuywdhd b F’ upp ubp ; h c h cud w cuz y d F h F wud hv d cuy fd ubp h w AH -b. I dd, hGSE kw h h upp C dpdd hvy h AH d “d h k” d w c bw. I 2005 d2006, h Buh d d w ub Rpubc Cw c h u F d Fdd, d h GSE dd C hd h . T c h ubp d w k c k h h y—u h h GSE w h p uc w c cd—w hu cc F’ . Whu upp h Dc C, h w fc chc h h Rpubc C wud c

uh uy . T w xpd F cc bu “vc,” d pvkd wd- cd wh h f bu hw hy cud h dhp w-c d.

Nvh, huh F hd w cp k h wh Cuywd d h, dd hv h h p

106 Id M Fc, Te 2009 Mortgage Market Statistical Annual—Volume II , pp. 139 d 140.

107 Id M Fc, Te 2009 Market Statistical Annual—Volume II , p.143.




fc cpcy d . I h d, F w ub k y fcc du h ky y 2005 d 2006 h wud k h h ubp d y . Ty ducd h udw dd h d cy kp pc wh h c AH , bu fcy byd h qu.

I ky dd Ju 27, 2005 (h “Cd” ), Lud,Excuv Vc Pd S Fy Bu, ddd h qu F’ k h d hw h h p cud b d. T d h p. I hw h v h dd 2005 h w db wh F bu whether cp k h whCuywd d h h ubp u. N uch cp hd cuy bu. Lud h dcu h by y “W ccd…[h p] W c w k chc: 1. Sy h Cu [] 2. Mh Mk Wh h Mk I”. “Sy h cu” y

h quy dd h F hd y wd up hp (xcp cy HUD’ AH ). “M h k” cp wh Cuywd d h y by cqu uby more NM h h AH qud, bu by cqu uch riskier h F—whch pczd fxd —hd b buy up h .

T k p cqu wud hv cudd uch ub Op ARM (vv v z) d h vv up ( “yd”) k wh whch F hd p xpc.Tu, Lud d h cp h bu F ckd “cpbd ucu…kwd… w cp pc..[d] vupp ubp.” H ccu w k h chc: “Realistically,we are not in a position to ‘Meet the Market’ today.” “T,” Lud cud,

“we recommend that we: Pursue a ‘Stay the Course’ strategy and test whether market changes are cyclical vs secular.” 108 [ph uppd]

I h bc h Cd , Lud h ubp d A-A dv h “k” “ ch” pduc PMBS u. H pu h vy h k h, bu v u h h chh vw h F w uquppd cp wh Cuywd d h h . Accd FCIC v, dd Mch 31, 2010,h c—Rb Lv (Excuv Vc Pd d Ch BuO c), Kh Bc (Excuv Vc Pd Hu d Cuy Dvp), d P Jh (S Vc Pd S Fy Bu)— ccud h F hud w Lud’ cd “y h cu.”

T dc y F’ dcu Ju 2005 h

Lud’ “Sy h Cu” cd w v chd chd du2005 2006—h pd wh F d Fdd w uppd hv bu cqu ub NM (byd wh w qud h AH ) d cp wh Cuywd ( ) W S.

Tu, Ju 2006, y h Lud Cd , Sph B.Ahy, h h ch h bd, d F’ xcuv: “2006

108 Lud, “S Fy Gu Bu: Fc Sc Cd” Ju 27, 2005.




y. b u, h u v. T c d whOFHEO [ h h, h d d cp qu py] dd. Ad y dp, it is clear that until we have eliminated operations and control weaknesses, taking on more risk or opening new lines o business will be viewed dimly by our regulators.”109 [ph uppd] S, ,w hv cf h F’ p c dd bv h h f w y p— h dd 2006— k h dd k h wud bcy cp wh Cuywd d h ubp d h w PMBS bckd by ubp d h NM.

Mv, h vy fcy-bd vdc h Fh v d w v fcy b cp k h whCuywd d h ubp d 2004 2007. F xp, ubw F’ ky fc d, pubhd by OFHEO, u, y 2008.110

b 8. F M Fc Hhh

E P: 00 00 00 00 007

N Ic ($ b) 8.1 5.0 6.3 4.2 -2.1

N I Ic ($ b) 19.5 18.1 11.5 6.8 4.6

Gu F ($ b) 3.4 3.8 4.0 4.3 5.1

N I (%) 2.12 1.86 1.31 0.85 0.57

Av Gu F (bp) 21.9 21.8 22.3 22.2 23.7

Ru C Equy (%) 27.6 16.6 19.5 11.3 -8.3

Dvdd Pyu R (%) 20.8 42.1 17.2 32.4 N/M

b 8 hw h F’ v u increased du hpd 2003 2007. udd h fcc h, cy udd h wy h bu wk. M F’ ubu—h bu h cpd wh cuz PMBS by Cuywdd h—w d wh wh p. I h d, hwh u, Cuywd W F, wud b p d k uy ch h wud h b pc. Ih c F MBS, h ky u w h GSE’ u , bcu hdd hw uch h pf h u wud b b . I h c PMBS u, w h u d c h cd hc dd AAA pc h cu bckd by h p.

T u hd chc cuz huh F, Fdd h W S udw. Tu, F wd cp wh h pvu ubp d h h w y wy d —by duc u (cd “G-” F d Fdd) d h wy k

cv u h u W S udw. T c hF d pp hv d vdc h v d cp h wh Cuywd d h h ubp u h d h Cd Ju 2005.

T OFHEO fc uy hw h F y hd vy

109 Sph B. Ahy F M Ch, k , Ju 27, 2006.

110 OFHEO, “M Mk d h Ep 2007,” pp. 33-34.




xby cp by w G-. I c d u quy w dc qucky du h pd, d cu G- wudhv hd h dc.

Fy, h F’ w p bu cqu ubp. Accd F’ 10-K p 2004 (whch, d, cvdpd huh 2006) d 2007, F’ cqu ubp by cd 2004 huh 2007. T h ub:

b 9.111 F M’ Acqu Subp L, 2004-2007

00 00 00 007

FICO <620 5% 5% 6% 6%

FICO 620-<660 11% 11% 11% 12%

T pc c wh F’ cpy wh hdu c h AH du h y 2004 huh 2007; hy

c wh uby c puch ubp d cp wh f k Cuywd h w w hk h huh cuz ubp d h .

Fy, F’ 2005 10-K (whch, d d fd My 2007, cvd 2005 d 2006), c h d 2006,cf h h GSE d cp ubp (xcp cy h AH ), d h c k h by dc d 2004, 2005 d 2006:

[I] c y, c pp -y h cd -d uch -y , v-z d ub-p , d dd d 30-yfxd- h dcd. We did not participate in large amounts o thesenon-traditional mortgages in 2004, 2005 and 2006 bcu w dd h h

pc d h d u c cp hdd cd k cd wh h . Tese trends and our decisionnot to participate in large amounts o these non-traditional mortgages contributed to a

signicant loss in our share o new single-amily mortgages-related securities issuances to private-label issuers during this period, with our market share decreasing rom 45.0% in2003 to 29.2% in 2004, 23.5% in 2005 and 23.7 in 2006.112 [ph uppd]

Accdy, dp k h Cuywd d h 2004,2005 d 2006, F dd p cqu uuu ub ubp d h h. Id, cud cqu y h ubpd h NM h w cy h AH . T h AH w F’ v cqu NM hw by h f’ c h PMBS k cpd 2007. A h p, F’ k h b Cuywd d h cud cu u PMBS. Nvh,

dp h ubp h w b hw up h k,F cud buy NM u hy w k v by h v

111 F M, 2004 10-K. T d cud F’ puch ubp PMBS.hp://www..c//pd/c/2004/2004_10K.pd;jd=N3RRJCZPD5SOVJ2FQSHSFGI, p.141 d F’ 2007 10-K, hp://www..c//pd/c/2008/10k_022708.pd ;jd=N3RRJCZPD5SOVJ2FQSHSFGI, p.127.

112 F M, 2005 10-K, p.37.




Spb 2008. T h y ck bhv bvu—hy w ubjc h AH , whch w c huh h pd. I hy hdy cqud h NM cp wh Cuywd d h kh h cp w dy v; h cp hd bdd h fd.Bu h c h F dd — cud —c k h bw2004 d 2006 hw whu qu h k h w h hy hd cqud y NM by h hy d Spb 2008.

Bud by ccu pb, u dhd pfby, dck h cpby vu h k h w kd hy wudhv buy, F hd p bu y h cu hy hd b w 15 y. T NM hy buh du h pd 2004 2007 w cqud cpy wh h AH d c h k h— uch F h hv pd d . F’ k h fy dd c 2007, wh h -bckd k cpd, Cuywd wkd, d h

Cuywd y cud cu cuz . I p h bd dc Ocb 16, 2007, Mudd pd h F’ kh, whch w 20 pc h wh k h b 2007, hd 42 pc.113

T v h pby—h F d Fdd w buyNM bcu hy w pfb. T u ddd h x c.

Did Fannie acquire NMs because these loans were proftable?

F , c h GSE hv ud h h GSE’ v cqu NM w h hy hd cpy wh h AH, bu h hy w k h pf h ky pducd. T cudhv b u h 1990, bu h j c h AH 2000

F b cz h cpy wh h w duc h f’pfby. By 2007, F w k h .T w b, dw FHFA pubc, hw h ppcb

AH v h pd 1996 huh 2008 d h GSE’ ucc h.

113 F M, Mu M h Bd Dc, Ocb 16, 2007, p.18.




b 10.114 GSE’ Succ M Adb Hu G, 1996-2007

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008L & MH G

0% % % % % 0% 0% 0% 0% % % % %

F Acu 45% 45% 44% 46% 50% 51% 52% 52% 53% 55% 57% 56% 54%

Fdd Acu 41% 43% 43% 46% 50% 53% 50% 51% 52% 54% 56% 56% 51%

SA G

% % % % % 0% 0% 0% 0% % % % 7%

F Acu 15% 17% 15% 18% 19% 22% 21% 21% 24% 24% 28% 27% 26%

Fdd Acu 14% 15% 16% 18% 21% 23% 20% 21% 23% 26% 26% 26% 23%

UG

% % % % % % % % % 7% 8% 8% 9%

F Acu 25% 29% 27% 27% 31% 33% 33% 32% 32% 41% 43% 43% 39%

Fdd Acu 28% 26% 26% 27% 29% 32% 31% 33% 34% 43% 44% 43% 38%

A h b hw, F d Fdd xcdd h AH vuy chy, bu by fc . Ty py kp pc wh h c h h qu c c v h y. T u hhy dd c h puch d pf. I h w h puphy wud hv uby xcdd h , c h fc dv(w fc c d w cp qu) wd h py h hy wd h y h cp. A HUD d 2000:“Bcu h GSE hv ud dv v h k pcp, hy hv h by udpc h cp d c h k h.”115

A y 1999, h w c cc F bu hw h 50pc LMI —whch HUD hd d x v—wud b .I Ju 15, 1999, du,116 u F b ppd hc u ch h wud b F h y:() pud HUD ch h ccu (wh h ud d); () h bu wh h pck h b -ch, uch ucud hu d, fcy, A-A d ubp (“E xpd A-A d A-k (h hh d ubp d) hud yd c bu h w hv uy c u w-dd-c c”); d () pud HUD dp d hd c.

By 2000, F w cvy cp wh bk h w qud k ud CRA uhy h ppu w-cbw d HUD’ AH . Rh h h CRA F d Fdd, bk d S&L hd bu h p. I p Nvb 2000, By Z, S Vc Pd F,

d h “Ou w cd vdc u h h c [ bk’ d

114 FHFA M Mk N 10-2, hp://www..v/wbf/15408/Hu%20G%201996-2009%2002-01.pd.pd.

115 hp://wb.cc.p.v/c-b/dc.c?db=2000_&dcd=p+65093-65142.

116 B, Ky, Kud d Wch, huh Z d Mk Fk R, “RE: HUDHu G Op,” Ju 15, 1999.




S&L’ hd p] du p bw-k CRA pduc.”117 I h wd, bk d S&L ubjc CRA w k bw k , d hu cud h whu k .T w ub F bcu h d cpu h hy wud hv c wh hy w w py h . D wud udpc h k hy wud b u.

I p cz wh w hpp. F, d h bk dS&L ud CRA, w w cp h kd NM, d wd by w h udw dd d dd xbd ubd. Spy u uppy d dd, h pcp h cp w qud py hh pc h cy ky . T bk d S&L h cqud h cud h,whu k , wh k w hh h h h. T h f dc h dcu h h FCIC cvd

F h cp ubp h GSE, bk, S&L,d FHA w cu h udpc k— h pcp cu h dw d hu h fc c.

I Juy 2003, F b p hw c HUD b hx ud c h AH , xpcd ccu 2004. I “AcP h Hu G Rw,” dd Juy 22, 2003, F vwd ub p, d ccudd h “F hud y pp: c d w ub.” (Sd 35)118

I Mch 2003, F ppd w c h AH , ppd p, php HUD pcy d pubcu. T pp pup w hw h h hud b cdfcy 2004. Sd 5 d:

I 2002, F M xcdd u h 9h h y. Bu w pbby

h ch v w’v v cd. M h qud hc4h qu h p y c h cpy. Vc w ccd.T dh bud. Mv, h ch kd u h bu d h hu. Epcy bcu h ud h h wcdd d d— uf u qudy uc—and did deals at risks and prices we would not have otherwise done.119 [ph uppd]

By Spb 2004, w bc c h cu c h AH w hv j dv c F’ pfby. I du B Gh (h F c), Pu Wch, Dc Mk Rch d Pcy Dvp, w: “M h d cuk p fc c h Cpy d py cu k-d bhv. I 1998, 2002, d 2003 pcy, h Cpy h hd puu c c uch hu h

cc h c.”120

I Ju 2005 p d “C d Bf M

117 By Z, “F M d My Ld: A d Ac P” P,Nvb 16, 2000.118 F M, “Ac P h Hu G Rw,” Juy 22, 2003.

119 F M, “T HUD Hu G,” Mch 2003.

120 F M , Pu Wch B Gh, “RE: M L,” Spb 3, 2004.




Acv,”121 h uh d d 10 h AH c hd $2,632,500 2000 $13,447,500 2003. Sd 17 d: “M FuuHUD G App Qu Du d Py Cy” d p, “Bd 2003 xpc wh cqu c (v F M d )c bw $65 p u h f qu $370 p u h uhqu, h h cud c h cpy $6.5-$36.5 puchu c u.” T p ccud (d 20): “C cv—xpc d pc—v h 2000-2004 pd ky vd ppxy $200 p y.”

E, I d h F d Fdd wdw-d hcd HUD by py cqu h wud cpy wh h AH, wh v h h p cqu h . I 2005,w b by F’ ccph h wdw-d h wy--dy cqu --b F c

h AH h y; w h f ccu ycy h c -cpc F’ pfby. I p ddSpb 30, 2005, By Z, h ky F c db hu,ud “bu d p.” Ud h v, F wud k vj d d u 2006 d - F cqu.T wud duc h d h AH cpu d hu bF cpc h 4h qu 2005. T c h d w d $30-$38 .122

I p HUD Ocb 31, 2005, d “Upd FM’ Hu G Pc,”123 F d v “Udb dNcy M G.” T cudd fc dd cd k, dv u (“D cc w bw u; d pduc v u” d “G- y cv xpcd ”). O

h why p w h w: “Lqudy Qub Pduc:Buy xc pduc cu cu ky d; y pducp wh fc k-y; cu k py hck d quy; p d wv u pb d pc bu.”

Much h v bu h fc c p h ucupuu duud ckd bw k bd .T d h pdy d w j uc h NM h fcy 2008 fc h C jy’ p, huhh C w v b pvd y d upp h p. TF d u h dubbd “pdy” h cuy hv bd cpy wh h AH . T pby ud, , 2004 Fdd’ CEO, Rchd Sy, by Fdd’ ch k ,

Dvd Aduk, wh Sy w cd whh uhz “Nj” (c/ jb/ ) pduc h h uy ppvd. Aduk ud uhz Fdd’ puch: “T p h pcp d y

121 F M, “C d Bf M Acv, Pjc Ph,” Ju 14, 2005.122 By Z, “Hu G d My Ld,” Spb 30, 2005.

123 F M, “Upd F M’ Hu G Pc,” P h U.S.Dp Hu d Dvp, Ocb 31, 2005.




pdy d, wh h pduc .”124 Bu h pduc w ppvdby Fdd, pbby h d by h Fdd py: “T A-A[(w dc/ dc)] bu k cbu u HUD .”125

O My 5, 2006, F h S Fy Bu CdC vd h u cd d fc pb F w cwh cqu ubp h AH . T dcbh cpv dcp, whch “pduc hc Fdd Mc,FHA, A-A d ubp d hv cbud cd cp ch …O h u cbu [ whch h hh py ch xp h buy] v FHA h xpdd h udby w 6% cbu LV up 97% h c b ud wd c,ppd xp, dcu p d h fc cc.”126

T du y-p wh y bu h cd kF hd k d h -ch dd HUD’

AH qu 2006. b 11 bw hw h c NM hu (G-) “p.” (I d d whh cbud u quy, F ud G- pc d h k ccu cdk w ub h c; G- “p” w h dc bwh G- qud by h pc d pcu cbu u quy d h dd .) T b h hw h u h ubp pduc ud cd, 30 y fxd (FRM), 5 y ARM, d 35 d 40 y fxd . F pcy, hy w dcu y h 30 y fxd pduc. T b hw h h bpduc, h 30 y FRM, wh a zero dwpy hud b pcd ccd h d G- 106 b p. Hwv, h p h F cuy buy k h pc c wh u 37.50 bp, pduc p ( h d) 68.50 b p. T

h p hw h b: h cpd du h z-dw w 34 percent . T b h k h pb v, wh h w u:

124 Fdd Mc, , D Cw bh Dvd Aduk Dck Sy, “RE: NIc/N A (NINA) M,” Spb 7, 2004.

125 Fdd Mc, Mk My Dck Sy, “FW: FINAL NINA M,” Ocb 6, 2004.

126 F M, , S Fy Bu Pduc M d Dvp SFy Bu Cd C, “RE: PMD Pp Ic Hu G L,” My 5,2006, p.6.




b 11.127 F M k L Hh Rk MNcy M h Adb Hu G

I E( “” MCM- )

30 YR FRM

Md F AvDu %

Gp

B: 00% LV, 0% MI 0 -8.0

I F (IF) 129 40 -91.50

S Cbu (SC) 115 23 -77.50

py B/D (BD) 118 37 -80.50

Z Dw (ZD) 106 34 -68.50

Mucud Hu (MH) 227 42 -189.50

F h p, c h d h AH F hd py up -ch , k hu cd k h wy.

T d fc u h w dvp F u h

AH w dcbd F’ 10-K p 2006, whch cpdbh vu d hh cd u cqu h qud by h AH :

[W] hv d, d cu k, fc dju u uc d puch HUD’ cd hu d w ub. T cud puch dcuz c wh lower expected economic returns than our typical transactions. W hv xd u udw c b -quy d cd u v hh-k pduc h ky v h bw d by HUD’ dub, which could increase our credit losses. [ph uppd]128

T udy h “w xpcd u” w pd Fbuy 2007 dcu h FCIC cvd F, whch d h 2006 h “ch w c” h hu w $140 whh “ppuy c” w $470 .129 I p HUD h AH ,dd Ap 11, 2007, F dcbd h c w: “T c [ h ] ppuy c vu. I 2006, ppuy c w bu $400 , wh h ch w c w bu $134 . I ppuy c w $0, u hhd wud b d h d. T chw c h pd u pck c.”130

By h , “A M”— whch F cdd hw hy wud h AH —w k pc hy (ccd h qucy wh whch p A ccu hdcuy cd). I A M Ju 22, 2007, “HuG Fc,” h p w cdd h 2007 AH , v

127 Id., p.8.128 F M, 2006 10-K, p.146.

129 F M, “Bu Upd,” p. “Ch w c” qu xpcd vu uxpcd . Expcd vu wh w b cvd G-; xpcd cud G&A dcd . “Oppuy c” h G- cuy chd u h d —h h F’d wud p u h quy d k u cp.

130 F M, “Hu G Bf HUD,” Ap 11, 2007.




huh h h y w dy . O h p w c u ppuy c $767.7 , wh h h w p ud ppuy c $817.1 .131 I Fc Juy 27, 2007, “P MB G,” whch pbby h p LMI cud ub, wpcd $1.156 b 2007.132

Fy, Dcb 21, 2007, B My, AScy Hu, F CEO D Mudd kd h, h h fcd cc cd h pv h cuy—pcuy h bc PMBS k d h c ub dquc d du—HUD’ AH 2007 b dcd “b.” H d h HUD h b “cd h fc cd h p wh dh by .” T h cud: “F M ub h h cpy k b c h ub h w bh fcy pudd ky cbu h chv h ub….In 2006, Fannie Mae

relaxed certain underwriting standards and purchased some higher risk mortgage loan products in an eort to meet the housing goals. T cpy cud puchhh k 2007, d bv h cqu -ch py pb c cd .”133 [ph uppd]

T cf w c h cc h qu why F (d Fdd) cqud y hh k 2006 d y:f, h cp w y h AH bhd by HUD d bcu h w pfb. I hw h h HUD d h—cud h C jy p— b h F d Fdd puch h h uy dd h vcy pcd.

Fy, Juy 2009 p, h Fd Hu Fc Acy (FHFA,h GSE’ w u, pc OFHEO), d h F d Fdd bh

wd h pcc c-ubdz h ubp d A-A h hy cqud:

Ahuh F M d Fdd Mc cd d-dvd c d h -y u hy ch, h pc ubdz h u u hh u hy xpc

u h . I bh 2007 d 2008, c-ubdz -y u chd by h Ep w vd c pducyp, cd c c, d LV c. I ch c, h w c-ubd h pd w cd k v h pdhh cd k. T d ubd y w h hh-k .134

T hh k w h dd by F d Fdd h AH . Nd y, h d c-ubdz h G-

h cqud bcu hy pfb.Accdy, bh k h d pfby u b xcudd

h F (d Fdd) cqud ubp d A-A bw 2004 d

131 F M, “Hu G Fc,” A M, Ju 22, 2007.132 F M, Fc M, Juy 27, 2007 d 4.

133 F M , D Mudd A. Scy B My, Dcb 21, 2007, p.6.

134 FHFA, F M d Fdd Mc S Fy Gu F 2007 d 2008, p.33.




2007. T y v—d h vd —w h c h AH pd by HUD.

I 2008, kv by h v, F M fy pubhd cd upp 2008 10-K, whch cd ccu ubpd A-A cd xpu. T b pducd bw d pvd pcu h kd F cqud d h AH . Ly pp h cy, h b d v F’ xpu ch cy, d cud F’ hd -FMBS PMBS, whch dd hv v d. N h c $8.4 b h cu ubp . A d , F cfd ubp y h h puchd ubp d. Hwv,F cudd wh FICO c h 660 h b, dc hhy p bu whu cy h y ubp.

I cd upp, fd Auu 2009, F d h

dupc h b 12, d pd h Ju 30, 2009, hd h cd k NM wh upd pcp u $2.7 .T v u w $151,000, 5.73 NM .135 T ub d cud F’ hd ubp PMBS whch d hv v d.

135 hp://www..c//pd/c/2009/q2cd_uy.pd, p.5.




F M. A d , d vw h h GSE h fc c, h C p d uc vw F M, d h h d cu py dcu cvd F. Hwv, h w uby d Fdd Mc. I dcu dd Ju 4, 2009, d “C Fdd Mc’Adb Hu M,” p h Bu Rk C, h Bd Dc,136 v p w d h hw h xpc Fdd w d h F’:

• Ou hu cpc qud dc ubdy p 2003, buc h ubd hv vd $200 p y.

• Hh cd k dppy d b -quy.d db d y qu ‘ccp’ uby hhcd k.

• W ch d (d b) db -y , bu uh uy h hh c k.

• G-quy -y ccud h dpp h u 2008 zd h w pdcd by u d. (d 2)

• I 2007 Fdd Mc d w ub, bu cpc w ubquy dd b by h u du cc cd. I 2008 FddMc d x d ub, fv whch w dd b. Nc c w k d h xh d bcu ufc cd. (d 3)

• G-quy d b hh k. Lw huhd c cwh vu k c uch wh, py by, hh--vu , w cd c. (d 7)

• d db hv uch hh xpcd du pbb... Ov-h d db hv hh xpcd du pbbh h hh 5% --quy . (Sd 8)

T u h db hu c duc h GSE’udw dd w j pcy cd by HUD wuccv d, d u b czd uch w v udd wh cud h fc c. Uy, h AH xdd hhu bubb, ud wh wk d hh k NM, cud h vcy F d Fdd, d—h wh h U.S. hu pcy—wh pcp cu h fc c .

Wh C cd h Hu d Ecc Rcvy Ac 2008(HERA), d h pby d h db hu HUD FHFA. I 2010, FHFA dfd d pfd h AH ,

d d h ub . A F hd d, h AH xcd h ub -b bw h k, hy w bcd c cd, k h dd c d pvd w-c bw. I c, h w cc bw h dvcdb hu d h qud cdy

136 Fdd Mc, “C Fdd Mc’ Adb Hu M,” Bu Rk C, Bd Dc, Ju 4, 2009.




k h U.S. T w FHFA u d qu hGSE puch quy h h pc h k hh cu.137

T d v h j pb wh h AH . I h h h b h v dc wh pv cpy xdcd, hy hy v cd c. M fcy,h cp h GSE, FHA d h bk h qud ud hCRA fd d cqu h kd w cu cu h udpc k h h vuy buh bu h dw d h fc c. T dcud h x c d hc h CRA.

4. Competition Between the GSEs and FHA

for Subprime and Alt-A MortgagesO h p c bu HUD’ h AH

w h pcd F d Fdd dc cp wh FHA, cy wh HUD. T w dy d h F dcu cd bv.F d h cc HUD, bu h c hh cp xcy wh HUD d C wd. I p c h cx whch h GSE Ac w cd 1992. I 1990, C hdcd h Fd Cd R Ac.138 O pup w cpu hv’ bud h k h v cd wh u,d c pcd budy FHA u. F h C d HUD wh vd cd d w cbw d udvd cu, h cquc h FCRA y hvb ub. Wh hd pvuy b wy xd upp up

wh w hw b cv —whch y qud 20 pc dwpy d h dc w d by py—w ppd b py cd. Rqu h GSE k up h db hu wud hv kd h k u, cF d Fdd hd ud cc ud h pv k d w-bud .

Lkd h ppcv, wud k C d HUD pc h GSE d FHA cp, ju d pu F dFdd cp wh h db . Wh h cp h kd , d wh HUD’ c bh FHA’d dd d h GSE’ db hu qu, udwqu wud vby b ducd. HUD’ xpc d quy xpd

duc udw dd, k cd vb w c bw, pvd p vdc HUD’ v c h cp.

137 Fd Hu Fc Acy, 2010-2011 Ep Hu G; Ep Bk-Ey Pcdu; F Ru, 12 CFR P 1249 d 1282, Federal Register , Spb 14, 2010, p.55892.

138 V h C Bud Ac 1990. Ud h FCRA, HUD u h uc FHA’ cd ubdy bud pup. T cd ubdy h d cpducd by d py.




Ebhd 1934, w p HUD d dd by h FdHu Ad (wh h A Scy Hu), FHAu 100 pc b . I w bhd pvd fc pp wh cud h dd bk-d cv. T ud hd xu LV 80 pc 1934. T w 95 pc 1950, d 97 pc 1961.139 Wh xu LV 97 pc, FHA d v FICO c bw ju bw 660 1996 2006. Du h pd, h v FICO c cvubp bw w wh w.140 B 1993, hy Fd Fdd w ducd cp, FHA b c pc wh w dwpy. T hd h pdcb c dqucy , hw h fu bw ppd by Edwd P wh d FHA,h FDIC, d h MBA:

Fu 6.

Dp duc qud dwpy, FHA’ k h v- v h GSE b dc. Accd GAO d, 1996, FHA’ kh w-c bw w 26 pc wh h GSE’ h w23.8 pc. By 2005, FHA’ h w 9.8 pc, wh h GSE’ h w 31.9pc. I pp h y F M dby d FHA bwwh Cuy Hbuy P (CHBP). I du ppd 1993, F’ Cd Pcy up cpd F’ h-ppd CHBP

p FHA’ qu ud 1--4 y p (Sc203(b)) d hwd h F’ qu w cpv b.

139 Ky D. Vd, “FHA Rucu Pp: Av d Ipc,” Fannie Mae Housing Policy Debate, v. 6, Iu 2, 1995, pp. 308-309

140 GAO, “Fd Hu Ad: Dc Acy’ Mk Sh W Acd whPduc d Pc Dvp Oh M Mk Pcp,” GAO-07-645, Ju 2007,pp. 42 d 44.




FHA pp hv d d h GSE. I 1999—ju b hAH F d Fdd w b d—FHA dubd wh LV qu h 97 pc, 22.9pc 1998 43.84 pc 1999.141 I d dd cc udw dd d c ubp bu. T w Quck d Juy 2000 (ph h ),142 whch ky hvb bd FHA p xd 1999:

B . Whu FHA uc,y c’ d h h hy w bcu dw py jdbck. FHA dw py 1.25% 3% h pc d fcy w h h u h y d qu cv ub-p .

W FHA , % “ ” . Idd h ud dd h dw py, bw hv py

c c, ppd uc d , w cw whchcud uc, hzd uc, d h wh ppy x.A FHA-ud h c b ucud bw d’ py h 3% h u--pck ud, cud h dw py.

T --

. FHA w hbuy u y b d -pfup cv h dw py d dd c c d . I c,v 100% p v ccpb.

FHA’ x. Cpd cd qu bhdby y d h yp h , FHA cu y bw’

12-24 h cd hy. I dd, h u FICO c - bk k ch ppc c-by-c b. I pcy ccpb pp wh NO bhd cd cv wh h p.

FHA --

. Cv h w bw hv 36% h c bud h w hy py cbd wh xdb. FHA p w bw cy 41%, d ccuc, v.

I p b h 1999 h y h HUD w p b p-up h AH h GSE— 42 pc LMI 50 pc, whv pc c h pc db cy h wud b cpv wh FHA. T j c h pc FHA’ whLV qu h 97 pc hd ccud 1991, h y b hGSE Ac pd h AH F d Fdd, d c dcd h cd dwpy 5 pc . I 1991, FHA’ pc

141 Id Fc E, “Acu Rvw h Fd Hu Ad MuuM Iuc Fud (Excud HECM) Fc Y 2009,” ppd U.S. Dp Hu d Ub Dvp, Nvb 6, 2009, p.42.

142 Quck p , “Quck L F O FHA H M Ny O TI Wh HUD´ ppv, Iu xpd h whp wd, cuwd vy h p”, Juy 20, 2000, hp://wb.u.c/bu_u/p_/2000/01-20.h.




qu h 97 pc uddy 4.4 pc 17.1 pc.143 A, FHA, ud h c HUD, pp b cp hGSE h wud d h duc h udw dd. Sc FHA v cy, c c b xpd by pf v. Id, c h FHA ducd d dd p HUD pcy dF d Fdd h dc.

T u F’ cp wh FHA hh LV d hw h w fu, whch cp h pcv h FHA d F hcy wh LV qu h 97 pc, cud F wh cbd LV qu h 97 pc.

Fu 7.

Whh ccu pcy HUD , cp bw h GSEd FHA ud dy h GSE w v h db hu 1992. T c h FHA, cy cd by HUD, uby cd h LV wud ccp 1991 (ju b h GSE w v hdb hu ) d 1999 (ju b h GSE w qud c h db hu ) uh vdc h HUD wcd h pc h c cp bw FHAd h GSE. T c w dv dw udw dd, whch HUDhd pdy dcbd .

5. Enlisting Mortgage Bankers and Subprime

Lenders in Affordable Housing

I 1994, HUD b p h b h fc cuy h duc udw dd. I h y,

143 GAO, “Fd Hu Ad: Dc Acy’ Mk Sh W Acd whPduc d Pc Dvp Oh M Mk Pcp,” GAO-07-645, Ju 2007,pp. 42 d 44.




h M Bk Ac (MBA)— up fc f hw ud by h d v d ubjc HUD’ uhy—d j HUD p cd h “B Pcc Iv.”144 T ccuc uud h wh bcu, bu cpy ccu u h h MBA d up vd by HUD cv bk ud h Cuy Rv Ac (CRA),whch up h p hd y ppd y v-ud bk.

I d-Spb [1994], h M Bk Ac Ac-wh bhp cud y bk-wd cp, d h-y b-pcc wh HUD. T cd w p: MBA’ wk -d u cuwh HUD d d b-pcc h dvdu bkcud u dv h w wh HUD. T f uch ,d by Cuywd Fud Cp., h ’ bk,

uzd [bw]. My hv h MBA ppv k c uu h bk hud b pud ud hub h CRA.145

A h f b h MBA , Cuywd pbby zd hh w pc dv b w-c d, d bc vy up ubp d whw pp uy F d Fdd b k uc h ubp h wud b h h AH . By 1998, hw 117 MBA HUD’ B Pcc Iv, whch w dcbd w:

T cp d c h “B Pcc” A y c h pb ud h F Hu Ac, bu k ccd xcd h qu. I , h

d vw pc ppc u h ppc hvvy ppuy quy . Ty k y z h bw y b vd d pvd

p whch ppc quf…. T u h v p.A d dcv w, uppd k, h y d w-c ppc d hv . Cquy, h hwhp w-c d y up h cd huhu h .146

Cuywd w by h p pcp h HUDp. Ud h p, d u-b d c,cu “ d c” d y d w c

144 HUD’ B Pcc Iv w dcbd h wy by HUD: “Sc 1994, HUD h d FLd B Pcc (FLBP) A wh d c h h dvduy d pubc-pv php h cdd h d d. T A y

ppuy c w-c d y d bu hy cp hu dqu ppuy pcp d dd. T bk d d, pd by Cuywd H L, Ic., v duy d h cu by d c vy uh d.” Avb : hp://www.hud.v/c/h/wk/w2001.c.

145 Sv Cch, “F-Ld Pu Bud”, ABA Banking Journal , v. 86, 1994, hp://www.qu.c/Sch.q?dcId=5001707340.

146 HUD, “Bud Cu d Nw Mk h 21 Cuy,” FY 1998 Rp , p.75, hp://www.hudu./pubc/p/98c/NwMk.pd.




, whch p ufd by ubp d h NM F dFdd. I 2000 p, h F M Fud d: “FHA cudh h Cuywd’ cvy, u F M d Fdd Mc bccp wh hh LV d udw xb.”147 I 2007, w h b cu by Bk Ac, Cuywd pd h hd d $789 b wd d c.148

6. he Community Reinvestment Act

T cv h v c NM bw 1993d 2008 w h h CRA.149 T c, whch ppcb y dy ud dpy u, w y dpd 1977. I pup pw “qu ch ppp Fd fc upvy cy u uhy wh x fc u cu uch u

hp h cd d h c cu whch hy chdc wh h d ud p uch u.” T cpv h Ac uhzd h bk u whhd ppv uchc d cqu d bch wk xp hppy bk dd hv cy CRA .

CRA dd hv ub c ubp d h y c u h u ud h c w hd 1995. T 1995u qud ud bk cqu k “xb d vv” h hy wud hw hv d. I h , h CRA dF d Fdd’ AH cu h ch.

T w w vy dc ppc h CRA. T f, d h wh h bd ppcby, qu h ud bk k CRA h pcv . Wh h Ac ddd,

wy dcud h cy— bk . Bk(uuy pvy) cp h hy qud by h u kpud cpy wh CRA. O xp h w by c cuy bk p hhd:

Ud h ub h Cuy Rv Ac (CRA), duu pu w pu bk by h uy uh k ,

pcy , w c bw d hbhd. Tu w vy hvy hdd d h u. I w dw hbu hy qud [dcd ] ch d pcc c CRA , v huh w ud h ch w ky d pud. 150

O h h hd, h u dd h c d h c ud ,d pcuy y c h h CRA hd h fc c. T quy cd d pch by Fd Gv Rd Kz

147 F M Fud, “Mk Nw Mk: C Sudy Cuywd H L,” 2000,hp://c.kwdpx./kp2/p/pd/p_wk_cuywd.pd.

148 “Qu d Aw Cuywd bu Ld,” Dcb 11, 2007, vb hp://www.w.c/c/c/p/d/768.

149 12 U.S.C. 2901.

150 O uh’ f.




Dcb 3, 2008,151 whch h d p p:

Oy 6 pc h higher-priced loans [h h w cdd CRA bcu hy b hh cd wh h k chc] wxdd by CRA-covered lenders to lower-income borrowers or neighborhoods in their assessment areas, h c ph h h py cu CRA vu

pup. T u ud h by cc h p ub h CRA h ubp c. [ph uppd]

T w p h h qu b. F, u h CRA hh-pcd . T cc. My bk, d b u b h cy ub cy CRA , ubdzd h by k h w hh k chcc wud w. T u, p, bcu CRA y w c dvdu; uch, hy ky h dd c bw b ubp d A-A d hu uh

by FHA, F d Fdd d ubp d uch Cuywd; hcp h why h ky b w h h k chcc. Scd, wh bk d ud CRA h h pbby hd j c h v pc ubp hU.S. fc y, h bu CRA h h cc buhw CRA pd c h pc NM h hu bubb d h U.S. fc y y. T h u huh whch CRA’ h fc c ky b cdby fc.

I 1994, h R-N I Bk d Bch E ccy Ac h f wd bk c ud d w ( dc cpc). Ud h ccuc, h c pv h CRA, whch qud u whhd ppv ppc bk h dd hv cy CRA , bc pcuy v

bk h ppd d bk u ppv. I 2007 pch, Fd Ch B Bk d h h c hR-N , “A pubc cuy bk d cqu cvy cd, dvccy up cy ud h pubc c pc pbk ppc CRA ud. I c hhy cd ppc,h Fd Rv Bd d h c hd pubc w hpubc d h ppc c h d cd h bk qu. I p h w pu, bk b dv uc h CRA p.”152 T d dcp, huh ccu , d uy dcb h c h w d h ppc pc bk d pcc.

I 2007, h ub z y w-c cuy “dvccy up,” h N Cuy Rv C, pubhd

p d “CRA C” whch cud h ub ucc b u h v pvdd by h bk ppc pc b d CRA d c bk h hd ppd

151 Rd Kz, Spch h C Ccd Pvy Fu, Dcb 3, 2008.

152 B S. Bk, “T Cuy Rv Ac: I Evu d Nw Ch,” Mch 30,2007, p2.




d u ppv. T p c h p (bdd u h ):153

S CRA 977, z

CRA $.

.

Ld d cuy up w h wh d hubd ppc wh h u xpd vc.Ld u k h ppv d u h p ch h vc. T u d fc u uy c wcuz h CRA cd d d w h ky uu cuy v pc d. Te application process, thereore, provides anincentive or lenders to sign CRA agreements with community groups that will improvetheir CRA perormance. Recognizing the important role o collaboration between lendersand community groups, the ederal agencies have established mechanisms in their

application procedures that encourage dialogue and cooperation among the parties in preserving and strengthening community reinvestment. [ph uppd]

A h p:

T Fd Rv Bd w x h pubc c pd

du ppc pc up j qu by bk d cuy up. I cy Ru Y, h Bd dc h h pcduw ddd c dcu bw bk d cuy up dp h hp v h cvc d d h cuy. I Cp Mu, h O c h Cp h Cucy h w h xpdd ppc pc d h d d h CRA d by h u h cqu.

153 S N 12 supra.




I p, h NCRC d 446 c d cud h

w uy y-by-y c:b 13.

Y Au D($ )

D($ )

2007 12, 500 4,566,480

2006 258,000 4,553,980

2005 100,276 4,298,980

2004 1,631,140 4,195,704

2003 711,669 2,564,564

2002 152,859 1,852,895

2001 414,184 1,700,036

2000 13,681 1,285,852

1999 103,036 1,272,1711998 812,160 1,169,135

1997 221,345 356,975

1996 49,678 135,630

1995 26,590 85,952

1994 6,128 59,362

1993 10,716 53,234

1992 33,708 42,518

1991 2,443 8,811

1990 1,614 6,378

1989 2,260 4,764

1988 1,248 2,504

1987 357 1,256

1986 516 899

1985 73 382

1984 219 309

1983 1 90

1982 6 89

1981 5 83

1980 13 78

1979 15 65

1978 0 50

1977 50 50

T z h c, whch up h CRA d , u h p fcc h CRA cu h

fc c. I why h h C jy w w v cd h fcc h NCRC’ ub. I cc wh y h h hu u, d b y ch hd b d h NCRC, h C pubhd p bv CRA y pby h fc c.154

154 FCIC, “T Cuy Rv Ac d h M C.” Preliminary Sta Report , hp://www.cc.v/p/pd/2010-0407-Py_S_Rp_-_CRA_d_h_M_C.pd.




udd CRA’ h fc c, h v c h $4.5 bk CRA d c h h NCRC cd 2007 p.(T dcu d h h v h dcu w vd h NCRC wb, www.cc., hy cvd pubcy bu c b ud h wb155). O p qu whh h bk u cpdwh cuy up by whhd ppv ppc dcqu u c CRA d cy h cuy up hd b d. I d cu h hu dd w h v cc C h wud hv wdh u cuy up ch wh d c bk h hd ppd h ppv. I cc wh h ppvd h Fd h d h c by h bk pcp bu uu CRA d hv uc h ppvpc. A Fd c d h C’ h h Fd dd cd

h c cc wh ppc. T C dd p vy h , bu ccpd c vu Fd c. Nvh, h xp why bk hv b kh u c cc wh , bu hw.

T h c, d, w d by u bk h pdc—Bk Ac, JPM Ch, Cbk, d WF— cc wh cqu hw b 14 bw.

155 hp://www.cuy-wh./_pd/c-pubc/cdf/p-v-bw.pd.




b 14. Aucd CRA C Ccwh M Acqu by Fu L Bk d T Pdc

F A / CRA

CRA ( )

W F F U cqud by Wchv

Suhu cqud by Wchv

2001 ($35 b.)

2004 ($75 b.)

JPMCh

Chc whMucu Hv

NBD cqud by F Chc

H Sv cqud by Wh Muu

D cqud by Wh Muu

Bk O cqud by JPM Ch

1991 ($72.5 .)

1995 ($2 b.)

1998 ($120 b.)

2001 ($375 b.)

2004 ($800 b.)

Bk Ac

C cqud by Bk Ac

Bk Ac (cqud by NBk,whch kp h Bk Ac ).

Bk Bcqud by F

F

1994 ($1 b.)

1998 ($350 b.)

1999 ($14.6 b.)

2004 ($750 b.)

Cbk v

C Fd

1998 ($115 b.)1998 ($115 b.)

2002 ($120 b.)

Cpd by Edwd P h NCRC 2007 p CRA C, ud hp://www.cuy-wh./_pd/c-pubc/cdf/p-v-bw.pd , NCRC y d Bk Ac’ $1.5 CRA d c cjuc wh 2008 cqu Cuywd ud hp://www.hu.v/pp//h/fcvc_d/y_y_-_4.15.10.pd.

Gv h u z h c pd by NCRC, h ky qu : () hw y h c w cuy ufd by hbk h d h, () wh h dy, d () hw h p?

Cuy, h h vy d C v hu, h y p w h qu.

Were the loans actually made? T bk h d h cppy c ud pu cuy up uf h. I vw by Bd Bd h C’ , Jh Sv h NCRC dh cuy up dd w up h c.

Bd: Wh w up… k u h h bk h h vuy

h u c?




Sv: Acuy p h CRA w wh h bk w h y d cuy huh, ‘H’ wh yu’v pd. H’

wh yu’v d.’ T wud hpp -- b wh h bk d hcuy z.156

Nvh, wh h C kd h u bk (Bk Ac, Cbk, JPM Ch d W F) d whh h-d c w ufd d wh u, h bkuppd y d . Ty cdd h hy dd hv h h w d cu , d h hy uppd wkchy b.

I c, h uppd h C by h bk, h cu, cd w h hy hd cd p hv d uf h c. T p u w JPM Ch (cud WMu, $835 b), C ($274 b),

d Bk Ac ($229 b), d $1.3 CRA bw2001 d 2008, d hd b pd h C by Edwd P h .157 N W F p cud b ud, bu p qu h C W pvdd d d pdh h cud b pd udd whu uh dcu whpv h bk. Hwv, h C d h v h -d CRA c Auu 2010, b h cy dcud b hd. F h , h W d cud b upckd, pd dcu wh W c, d yzd.

A I pd h d h C h u Ocb 2010, h C d bd p h v h -d CRA c Nvb. Hwv, y bk hd pdd by h dd ub h d . A wh

h bk p, dd wk w qud udd h cvd, d h w , d C , w up.

A u h dy u h C’ v, wpb d hw y w cuy d ud h -d CRA c by h u bk d h pdc. T u pdd y fd u wh h dy d hc hdqucy . I pp h y c h C cd h h v CRA by h ub dcu qu d vw d by pv h w upwh h u h d pd dquy qu d.

Where are these mortgages today? Wh h dy u cy b pcu. S h bk d h FCIC h hy d duh bw CRA d h , d cud pvd h

. Ud h GSE Ac, F d Fdd hd v b hp bk h CRA b, d hy udubdy vd buy h d by h bk d h pdc puu

156 Ivw Jh Sv h N Cuy Rv C, Ju 16, 2010.

157 Edwd P, Exhb 2 h , dd Ap 21, 2010, hp://www../dcLb/P-Sz--Fd-Cbu.pd.




h c. I p 2003, xp, F pd h hd cqud $394 b CRA , bu $201 b whch ccud 2002.158 T ud ppxy 50 pc F’ AH cqu h y.

I h , bd h ch, P d h F dFdd puchd bu 50 pc CRA v h pd 2001 2007 d h, h bc, bu 10-15 pc w ud by FHA, 10-15pc w d W S, d h h bk h bk hd h .159 My h ky ub h cdy k bcu hy w d h dd cp k ckd uc—, h cp h h GSE, FHAd h bk p ud CRA qu vby d h pc dhu udpcd h k. h , h bk hd h wud hv k , whch y uw d.

What are the delinquency rates? Ud h H M Dcu AcHMDA), bk qud pvd d h Fd whch h dqucy h hv hh c b ccud. I w ud hh w h h h b wch py pdy. Wh Fd Fdd, FHA, Cuywd d h ubp d d bk ud CRA k h —uhy pk, bw bw h AMI— ky h h wh cuy d w b ccy h h pd b pb ud HMDA. I’ juuppy d dd. Accdy, h bk h d CRA puu hc hv b cd d p h dqucy , d d bv v h bk h d j c cddby h NCRC d FCIC h hy d’ kp cd bu h pc CRA p h .

Hwv, h p w y, Bk Ac h b p hpc CRA u p h SEC 10-K. Fxp, h bk’ 10-K 2009 cd h w : “A Dcb31, 2009, u CRA p cpd x pc h d bc, bu cpd 17 pc p d .T p cpd 20 pc d ch- du 2009.Wh ppxy 32 pc u d p c k pc, y p u CRA p cvd by h pc.”160 T cud b ppx h dqucy h-d CRA h h u bk d uf h c,bu whu dfv h ub d d h bk’cu hd pb k h wh y cfdc. I cu, h bk pd u dqucy h

d puu -d c 5 pc 50pc, wh h p hw 25 pc dqucy .

158 “F M P Hwy P $2 Ac D C; Ld Mk B Hu B Udvd F, Cu” hp://fdc.c/p/c/_0EIN/_2003_Mch_18/_98885990/p_3/?=c;c1.

159 , p.47.

160 Bk Ac, 2009 10-K, p.57.



533

IV. CONCLUSION

T d u h h U.S. v’ hu pcw h j cbu h fc c 2008. T pc d hdvp v hu bubb bw 1997 d 2007 d h c 27 ubp d A-A , y whch w dy du h hu bubb b d. T cd wh hwk d hh k cud h h pp wk h jfc u ud h wd h hd h — PMBS bckdby h — v uc qudy. Du, ck u, pdy d h h c h w cd h p hFCIC’ jy w dv c.

T pcy pc h ccu fc. I h c cud

hv b pvd py by ch h v pcd p h w py pb h fc c, h hw d h Ddd-Fk W S R d Cu Pc Ac 2010, dpd by C Juy 2010 d cd h pchv h Ob d d h 111h C.

T u h h Ddd-Fk Ac p h U.S.cy w cy hv j dv c cc whd jb c h Ud S du h bc h dcd. I h wh pc h hd b pd pv h fc c h php’ h w hv b b. Bu w cy pv hc—d wud hv b cy h c w cud by c h v —h h Ddd-Fk Ac uy vchd.

Fy, h pcp cu h fc c w uy hv’ vv h hu fc y, hu fc pcy h uu hud b djud ccdy.



535

APPENDIX 1

Hyphc L w Sc (N dbck)S

007; S . S/ x.

A :Nub = 53 ; vu f =$9.155 ;L P=1.2%% (u 3% cu & 40% vy);L Subp/A-A=12% (u 30% cu & 40%

vy);Av z : $173,000

L S

Nub : 53 P=40 Subp/A-A = 13 (7.7. PMBS + FHA/VA=5.2 )A Vu:P =$6.9 ($173,000 X 40 );Subp/A-A=$2.25 ($173,000 X 13 )L cu: $ ($6.9 p X 1.2%=$83 b

+ $2.25 ubp/A-A X 12%=$270 bO : .%

L S Nub : 53 P: 27 Subp/A-A:O ubp/A-A: 13 Oh ubp/A-A: 13 (10.5 F&F (xcud 1.25 dy

cud PMBS) + 2.5 h cuzd (y hd by h bk))

A Vu:P= $4.7 ($173,000 X 27 );Subp/A-A = $4.5 ($173,000 X 26 )L cu: $9 ($4.7 X 1.2%=$56 b + $4.5

X 12%=$540 b)

O : .%, 8%

N: N wc dbck c—h , h pc u ub cu Sc 2. Wh dbck c, wud




b v Sc 2 bcu ub cu wud dvdw hu pc uh d . T dbck c w ky cu f ppch $1 10% ud f .



537

APPENDIX 2

Hyphc L w Sc (wh dbck)

S 007; S . S

/ x.A :

Nub = 53 ; vu f =$9.155 ;

S :L p=1.2%% (u 3% cu & 40% vy);

L -dd ubp & A-A=14% ((u 35%cu & 40% vy);

L FHA/VA=5.25% (u 15% cu d 35% vy)

S :

L p=1.6%% (u 3.5% cu d 45% vy);L -dd ubp & A-A=25% (u 45%

cu & 55% vy);L FHA/VA & ukw ubp/A-A=15% (u 30%

cu & 50% vy)Av z :P: $173,000 ($6.75 /39 )

Subp/A-A/FHA/VA: $182,000 ($2.4 /13

L S Nub : 53 P=40 Subp/A-A=7.7 PMBSFHA, d VA=5.2 A Vu:P =$6.9 ($173,000 X 39 );Subp/A-A=$1.7 ($220,000 X 7.7 )

FHA/VA= $700 b ($130,000x5.2 ) xpcd cu: 4.7 (3% X 39 + 35% X 7.7

+ 15% X 5.2 )

L cu:$0 ($6.9 p X 1.2%=$83 b +1.7 ubp/A-A X 14%=$240 b + $700 b X 5.25%=37 b)

O : .9%




L S

Nub : 53 P: 27 O ubp/A-A: 7.7 FHA/VA: 5.2 Oh ubp/A-A: 13 (10.5 F&F (xcud 1.25 dy

cud PMBS), 2.5 h cuzd (y hd by h bk))

A Vu:P= $4.7 ($173,000 X 27 );O Subp/A-A = $1.7 ($220,000 X 7.7 )

FHA/VA= $700 b ($130,000x5.2 )Oh ubp/A-A: $2 ($154,000X13

xpcd cu: 8.4 (3.5% X 27 =0.95 ,

45% X 7.7 =3.5 , 30% X 13 =3.9 )L cu: $890 ($4.7 X 1.6%=$60 b + $1.7 X 25%=$425 b + $700 b X 15% = $105 b + $2 X 15%= $300 b)

O : 9.8%, 0%

fcic final report wallison financial crisis

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