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Subject:  Fannie Mae: Tipping point of risk Date:  10/5/2008  11:15 AM
Author:  WendyBG Number:  257726 of 489515

http://www.nytimes.com/2008/10/05/business/05fannie.html?_r=...


Pressured to Take More Risk, Fannie Hit a Tipping Point
By CHARLES DUHIGG
New York Times, October 4, 2008

...

...by the time Daniel H. Mudd became Fannie Mae’s chief executive in 2004, his company was under siege. Competitors were snatching lucrative parts of its business. Congress was demanding that Mr. Mudd help steer more loans to low-income borrowers. Lenders were threatening to sell directly to Wall Street unless Fannie bought a bigger chunk of their riskiest loans.

So Mr. Mudd made a fateful choice. Disregarding warnings from his managers that lenders were making too many loans that would never be repaid, he steered Fannie into more treacherous corners of the mortgage market, according to executives. ...

...

Between 2005 and 2008, Fannie purchased or guaranteed at least $270 billion in loans to risky borrowers — more than three times as much as in all its earlier years combined, according to company filings and industry data.

“We didn’t really know what we were buying,” said Marc Gott, a former director in Fannie’s loan servicing department. “This system was designed for plain vanilla loans, and we were trying to push chocolate sundaes through the gears.”...

....

“Fannie Mae faced the danger that the market would pass us by,” he said. “We were afraid that lenders would be selling products we weren’t buying and Congress would feel like we weren’t fulfilling our mission. The market was changing, and it’s our job to buy loans, so we had to change as well.”...

...

Fannie never actually made loans. It was essentially a mortgage insurance company, buying mortgages, keeping some but reselling most to investors and, for a fee, promising to pay off a loan if the borrower defaulted. The only real danger was that the company might guarantee questionable mortgages and lose out when large numbers of borrowers walked away from their obligations....

With that self-assurance [confidence in their new risk-analysis programs], the company announced in 2000 that it would buy $2 trillion in loans from low-income, minority and risky b