Fannie and Freddie had other reasons to buy the (securities), Mr. Rood added. For starters, they carried higher yields at a time when the two (mortgage) giants could buy them using money borrowed at rock-bottom rates, thanks to the implicit federal (guarantee) they enjoyed.
In addition, by law Fannie and Freddie were required to back loans to low-to-moderate income and minority borrowers, and the private-label securities were counted toward those goals.
“Competitive pressures and onerous housing goals (compelled) them to operate more like hedge funds than government-sponsored guarantors, ” Mr. Rood said.
In fact, Freddie was warned by (regulators) in 2006 that its purchases of subprime securities had outpaced its risk management abilities, but the company continued to load up on debt that ultimately soured.
As of June 30, Freddie Mac holds more than $80 billion in mortgage securities backed by more shaky home loans like subprime mortgages, Option ARM and Alt-A loans. Freddie (estimates) its total gross losses stand at roughly $19 billion. Fannie Mae holds $38 billion of securities backed by Alt-A and subprime loans, with losses standing at nearly $14 billion.
