An analysis of data disclosed in new lawsuits against former executives of Fannie Mae and Freddie Mac indicates that the two own high-risk loans estimated at $2 trillion — far more than they originally disclosed to investors.
The Securities and Exchange Commission last week announced two lawsuits filed against former senior executives at Fannie and Freddie. The defendants are accused of hiding their exposure to higher-risk loans.
On Monday, American Enterprise Institute Resident Fellow Edward Pinto issued an analysis estimating high-risk loan holdings at $2 trillion. That works out to 42 percent of their single-family mortgage guarantees and investments.
Pinto, the former chief credit officer at Fannie, said that the new data indicates that Freddie held $244 billion in subprime mortgages as of June 30, 2008, even though investors at the time were told such holdings only amounted to $6 billion. Subprime loans were those with FICO scores less than 660.
At the same time, Fannie was telling investors that its Alt-A holdings were $306 billion even though the real number turned out to be $641 billion. Fannie’s Alt-A exposure is 23 percent based on the SEC complaint, while an earlier report put its subprime exposure at 15 percent. Another 10 percent of loans at loan-to-value ratios in excess of 90 percent, according to Pinto,
“By mid-2008 more than 40 percent of their loans had risky characteristics,” Pinto wrote. “It was this unprecedented accumulation of weak and risky mortgages that precipitated the collapse of housing and mortgage markets and the ensuing financial crisis.
“When the financial crisis hit in full force in 2008, approximately 27 million or 49 percent of the nation’s 55 million outstanding single-family first mortgage loans had high risk characteristics, making them far more likely to default.”
Pinto says a closer look is warranted on the two firms’ characterization of loans.
Fannie and Freddie were motivated to acquire riskier loans because it helped them meet affordable housing goals, Pinto wrote.
