This 2007 testimony by a senior executive at Countrywide Financial Corporation before the U.S. Senate Banking Committee just came to my attention (H/T Tom LaMalfa):
Countrywide is predominantly a prime lender that offers the widest array of products available in the market place. While the subprime market represents over 20 percent of the overall U.S. mortgage market, it constitutes only 7 percent of Countrywide’s loan volume.
The toxic trio—Countrywide, Fannie Mae (which claimed that just 0.2% of its single-family mortgage credit book of business consisted of subprime mortgage loans under its definition), and Freddie Mac (which also claimed just 0.2% of its single-family mortgage credit book of business consisted of subprime mortgage loans under its definition)—demonstrates a level of grade inflation that would make an Ivy League professor blush. The “A” or prime loan was redefined so that it was no longer what it historically had been—a high quality, low risk loan.
This was no accident. HUD observed in a 2000 rule making:
Because the GSEs have a funding advantage over other market participants, they have the ability to underprice their competitors and increase their market share. This advantage, as has been the case in the prime market, could allow the GSEs to eventually play a significant role in the subprime market. As the GSEs become more comfortable with subprime lending, the line between what today is considered a subprime loan versus a prime loan will likely deteriorate, making expansion by the GSEs look more like an increase in the prime market. Since … one could define a prime loan as one that the GSEs will purchase, the difference between the prime and subprime markets will become less clear. This melding of markets could occur even if many of the underlying characteristics of subprime borrowers and the market’s (i.e., non-GSE participants) evaluation of the risks posed by these borrowers remain unchanged. [Emphasis added.]
The chart below documents the growing role played by the toxic trio. For 2004-2008 they accounted for nearly 60 percent of all first mortgage loans.
The cause of the financial crisis in the United States was the collapse of housing and mortgage markets resulting from an accumulation of an unprecedented number of weak and risky loans, most of which were called prime. When the financial crisis hit in full force in 2008, approximately 26.7 million or 49 percent of the nation’s 55 million outstanding single-family first mortgage loans had high risk characteristics, making them far more likely to default.