Following up on the last half of this Friday post:
The chart shows, based on experience, the chances of serious delinquency (90 days or more late) for various credit score ranges.
The items I superimposed demonstrate the following:
- How much additional risk Fannie Mae and Freddie Mac took on, and gave others tacit permission to take on, by lowering the credit score needed to get a conventional mortgage to 630 from 670.
- On top of took on by that, the even worse risk they took on by lowering the credit score needed to get a conventional mortgage to 590 from 630.
UPDATE, Sept. 21: To be clear the graph above shows the historical chances of going seriously delinquent in general, including secured and unsecured loans. You would expect the delinquency rate on mortgages to be somewhat lower, but not low enough to affect the lesson behind the chart and what Fan and Fred did to put money in the hands of people who had a too-high percentage of not being able, or willing, to pay it back.
There is more to this ugly situation. New research by Edward Pinto, a former chief credit officer for Fannie Mae and a housing expert, has found that from the time Fannie and Freddie began buying risky loans as early as 1993, they routinely misrepresented the mortgages they were acquiring, reporting them as prime when they had characteristics that made them clearly subprime or Alt-A.
So they relaxed the standards, and lied about the quality of the loans they were packaging after they relaxed the standards.
More on the unconscionably devolved situation at Fan and Fred is here at my early January 2010 Pajamas Media column (from January 8 or 9, 2010) and BizzyBlog mirror post (will go up on January 10 or 11, 2010).
ALSO: Read this from January 28, 2009.