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Wall Street, Not Fannie Mae and Freddie Mac, Led the Toxic Mortgage Market

January 26, 2011
Mortgage Lending

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Wall Street Led the Toxic Market

5 Facts You Should Know About Fannie Mae and Freddie Mac

Additional Resources on the GSEs' Role in the Financial Crisis

Fact: The GSEs were prohibited from buying subprime mortgages.

Fannie and Freddie could not guarantee or securitize subprime mortgages because subprime loans were outside the prescribed GSE guidelines. All subprime mortgage-backed securities were created by Wall Street firms—not the GSEs.

Fact: Although the GSEs did purchase subprime mortgage-backed securities as investments, they never did so in a volume that matched Wall Street's

The GSEs' investment in subprime mortgage-backed securities was far less than Wall Street's.

Fact: The GSEs eventually guaranteed and created investments with "Alt-A" loans—which were not affordable housing loans

Alt-A loans went to relatively wealthier borrowers with higher credit scores, though often these loans had risky features such as limited documentation.

Fact: Mortgage loans purchased by Fannie Mae and Freddie Mac—including loans to lower-income borrowers—are performing better than the private market.

As of June 2010, about 13% of GSE loans to borrowers with credit scores under 660 were 90+ days delinquent or in foreclosure. By comparison, the serious delinquency rate for subprime loans was over 28%.

Fact: Affordable housing loans were not the problem. The GSEs' losses were caused by risky mortgages that generally went to borrowers with higher incomes.

The GSEs' financial losses stem primarily from Alt-A mortgages, which are not connected to affordable housing. Abusive loan terms, rather than risky borrowers, bear the greatest responsibility for the foreclosure crisis. Studies show that "risky borrowers" who received sensible loan terms had significantly lower foreclosure rates than those who received dangerous subprime loans made by non-bank lenders.