Fannie, Freddie and Subprime

After reading bits and pieces of the Securities and Exchange Commission's complaint against the former heads of Fannie Mae and Freddie Mac one thought comes to mind: what exactly is a subprime loan again? The SEC accuses Dan Mudd, Richard Syron and others of underreporting the GSEs' subprime exposure. In the Fannie suit, the SEC says that at Dec. 31, 2006 Fannie had subprime exposure through its “Expanded Approval” program of $43.3 billion, but in a public filing the GSE said that the exposure was just $4.8 billion. Could it be that Fannie felt that EA loans were not really subprime? In other words, understanding subprime is a matter of semantics. One man's subprime is another's prime. But as we all know it should boil down to FICO scores and debt-to-income ratios – shouldn't it?