Fannie's Underwriting Exceptions Fueled Losses: Report

WASHINGTON — Fannie Mae granted more than 11,000 exceptions to its lending standards for single-family mortgages it owned in early 2005, according to a new government report attempting to explain how Fannie's portfolio faltered during the housing bubble.

The report by the inspector general for the Federal Housing Finance Agency said Fannie's underwriting standards did not change meaningfully between the height of the bubble and its aftermath. But there was a noticeable drop in the frequency of Fannie's exceptions — known as variances — to those standards between 2005 and last year.

"Many of these variances increased credit risk and effectively relaxed underwriting standards," the inspector general said in the report released Thursday.

The number of variances on outstanding Fannie loans fell from 11,718 in January 2005 to just over 2,000 in January 2009, according to the 34-page report. Since then, the number has fallen further, to 638 variances in September 2011.

The report found that the bubble-era underwriting exceptions hurt the quality of Fannie Mae's loan portfolio. Of the single-family borrowers that Fannie approved between 2005 and 2008, 5% had credit scores below 620, but that figure fell to 0% for loans originated between 2009 and late 2011.

Between January 2009 and September 2011, Fannie reported $50 billion in credit losses and $119 billion in credit-related expenses, mostly from single-family loans it bought between 2005 and 2008, according to the report.

"The variances' effective contribution to relaxed underwriting standards and purchases of riskier loans were major factors in Fannie Mae's recent credit losses and credit-related expenses," the report concluded.

The inspector general's report did not look at Freddie Mac's underwriting practices during the housing bubble.

It did, however, evaluate the job that the FHFA has done in overseeing underwriting standards at both Fannie and Freddie since the firms were taken over by the government in September 2008.

The report found that the agency has taken a number of steps to oversee the two firms' adherence to their underwriting standards, but that more improvements can be made. In a written response, the agency stated that it agrees with the report's recommendations.

"While we believe FHFA's approach to overseeing underwriting standards has been effective, we appreciate the OIG's specific recommendations for improvement," Wanda DeLeo, a deputy director at the agency, wrote in a March 2 letter.