---

The Law & Economics of Subprime Lending
George Mason Law & Economics Research Paper No. 08-17
University of Colorado Law Review, Vol. 80, No. 1, Winter 2009, pp. 1-86

...According to the transcript of a Bank of America
quarterly earnings call for analysts in October 2008, CRA
lending comprised only 7% of its lending volume but 29% of its
losses on mortgage products....

...Beginning in 1992, Fannie and Freddie received increasing
pressure by Congress and the Department of Housing
and Urban Development (“HUD”) to increase their “affordable
lending” operations. For 1996, HUD instructed Fannie and
Freddie that 42% of their mortgage financing had to go to borrowers
with income below the median in their area, a target
that increased to 50% in 2000 and 52% in 2005.165 HUD also
increased Fannie and Freddie’s obligations with respect to
“special affordable” loans, those borrowers with income less
than 60% of their area’s median income. In 1996, Fannie and
Freddie were expected to make 12% of their loans as “special
affordable,” a figure that rose to 20% in 2000, 22% in 2005, and
a goal of 28% by 2008. To meet these ambitious targets, Fannie
and Freddie encouraged lenders to dip further into the risk
pool of borrowers and to take on loans with increasingly risky
terms, such as ARMs, interest-only, and high-LTV loans. It
appears that this aggressive expansion of Fannie Mae and
Freddie Mac into subprime lending was a political strategy
adopted by their leaders in response to heightened congressional
scrutiny and criticism in the wake of the accounting
scandals at the agencies that emerged during 2003 to 2004 and
which threatened to lead to a revocation of their favored status
as government-sponsored enterprises....