CFC Continues to Haunt Fannie

Sometimes, coming in second can be a good thing. Last week Fannie Mae and Freddie Mac reported their first-quarter earnings with the former bleeding red ink of $23 billion and the latter losing a mere $9 billion. OK, I'm being sarcastic on the "mere" part, but if outside observers looking at FanFred think they are identical "sister" companies (with similarly sized portfolios) they are sadly mistaken.

One GSE losing more than twice as much as the other is not an anomaly. And I can only think that Fannie Mae's close ties to Countrywide Home Loans for many years might be one reason why its losses are that much worse than Freddie's. It was no secret in the industry that Freddie Mac officials (pre-government takeover) were unhappy that Countrywide sold most of its residential loans to Fannie. And that was by design, really. In the early 1990s, under the direction of then Fannie CEO/chairman Jim Johnson, Countrywide's founder and CEO Angelo Mozilo was actively courted and wined and dined (so to speak) by the GSE. The reason was simple: Mozilo's Countrywide was the largest residential lender in the nation. The more loans it funded, the more loans it could (in theory) sell to Fannie (as opposed to Freddie).

Freddie executives like Leland Brendsel tried to woo Mozilo but Brendsel (a former academic) didn't give Mozilo the warm fuzzies nor did he play golf with Mozilo like Johnson (and then eventually Frank Raines) did. At the time it made extreme business sense: capture the largest lender as a captive seller/servicer and you'd be guaranteed a steady flow of product. For years the running joke in the industry was that Countrywide was really a subsidiary of Fannie.

What was in it for Mozilo and Countrywide? Simple: cheap guarantee fees. The more Countrywide delivered, the cheaper the g-fee. Johnson's coup looked like a stroke of genius. But then Countrywide and Mozilo followed Roland Arnall into subprime lending. The rest is history - and a worldwide credit crisis.

It's often forgotten by the general business press that for 30 of its 40 years, Countrywide was solely a conventional/government lender. During the first subprime boom in the mid-1990s Countrywide avoided A- to D lending like the plague (though it did dabble in it a little). After the Russian debt crisis fueled the subprime bust of 1998, the business recovered in the early 2000s and Mozilo - thinking he could handle the risk - jumped in feet first. He saw dollar signs.

In time, Countrywide beat the pants off of Ameriquest/Argent to become not only the largest overall subprime lender but the biggest A- to D servicer, too. And just who did Countrywide sell most of its production to? Answer: Fannie Mae. Year after year when the government released its annual Home Mortgage Disclosure Act results, there Countrywide was - at the top of the heap, the largest seller of loans to Fannie.

Not only did Countrywide sell its prime production to Fannie but it sold its alt-A loans, too. (CFC securitized much of its subprime production. Did Fannie buy the end bonds? I have no idea.) But when it came to prime and alt-A this meant that these loans would eventually become Fannie's headache - not Freddie's. Like I said, coming in second isn't always such a bad thing.

When Fannie released its first-quarter results last week it provided a supplemental report detailing how its alt-A book of business was (by far) its biggest problem: $284 billion in alt-A exposure with a serious delinquency rate of 9.54%. In the first quarter, alt-A accounted for 39% of the GSE's credit losses.

Now, that's not to say that all of the alt-A loans held and guaranteed by Fannie came from Countrywide. But it might be argued that Mozilo, perhaps, played a key role in getting Fannie executives comfortable with nonprime. Raines, followed by Daniel Mudd, may've feared that if they didn't buy nonprime from Countrywide then perhaps the lender would bolt to Freddie. Luckily for Freddie, Fannie's top brass bought Mozilo's poker face.

Paul Muolo is executive editor of National Mortgage News. He can be e-mailed at Paul.Muolo@SourceMedia.com.