CHAPTER 5The Volcker Standard Gives Fannie Mae an Edge

JUST AS FANNIE MAE AND THE THRIFT INDUSTRY TOOK STARKLY different paths in response to their common financial problems stemming from mismatched mortgage portfolios, they produced starkly different results. In 1989 Fannie Mae was well on the way to creating a new type of funding tool, agency callable debt, that would allow us to profitably finance 30-year fixed-rate mortgages with manageable levels of interest rate risk. We had reduced our portfolio’s duration gap from three years to six months. We had added risk diversification by entering the MBS guaranty business, and by 1989 we were prudently underwriting, conservatively capitalizing, and properly pricing these guarantees. After losing ...

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