The Wall Street Journal

The Mortgage Crisis: Some Inside Views
The Wall Street Journal

Emails show that risk managers at Freddie Mac warned about lower underwriting standards—in vain, and with lessons for today. The turning point was the spring and summer of 2004. Fannie and Freddie had kept their exposures low to loans made with little or no documentation (no-doc and low-doc loans), owing to their internal risk-management guidelines that limited such lending. In early 2004, however, senior management realized that the only way to meet the political mandates was to massively cut underwriting standards.

[Chief Risk Officer David] Andrukonis wrote to Chief Operating Officer Paul Peterson, « In 1990 we called this product ‘dangerous’ and eliminated it from the marketplace. » He also argued that housing prices were already high and unlikely to rise further: « We are less likely to get the house price appreciation we’ve had in the past 10 years to bail this program out if there’s a hole in it. »

Donna Cogswell, a colleague of Mr. Andrukonis, warned that Fannie and Freddie’s decisions to debase underwriting standards would have widespread ramifications for the mortgage market.

Ms. Cogswell’s Sept. 4 email to Mr. Syron and others also anticipated the potential human costs of the mortgage crisis. She tried to sway management by appealing to their decency: « [W]hat better way to highlight our sense of mission than to walk away from profitable business because it hurts the borrowers we are trying to serve? »