And if you look on page 13, you can see that Alt-A loans (as designated by Fannie), were about 11% of the mortgage book at year-end 2008. But they generated about 38% of cumulative credit losses. Based on the reported 12/31/08 Alt-A balance, $292 billion in loans had a loss rate of about 16%, or about five times higher than that for the remaining $2.4 trillion mortgages on Fannie's books. For the other 89% of the loan book, the loss rate was under 3%, which is pretty damn good performance after a housing crash. (See also, "The Real Reason Fannie and Freddie Lost So Much Money."
Remember, investors are looking for risk concentrations indicating poor loan performance. Based on Fannie's reported Alt-A loan data, investors see a proportionality and order of magnitude that appears to be consistent with loan data reported everywhere else.
But consider this paragraph from the complaint:
165. On average throughout the Relevant Period [between December 6, 2006, and August 8, 2008], Lender-Selected Reduced Documentation Loans - the undisclosed Alt-A loans - had SDQ [i.e. serious delinquency] rates that were 1.4 times higher than full documentation loans with otherwise similar credit risks.
That appears to be a somewhat misleading way of saying that the serious delinquency rates on the "undisclosed Alt-A loans," were not very different from the companywide average. The entire loan book's serious delinquency rate, during the relevant period, was between 1.2 to 1.3 times higher than the serious delinquency rates of the non-Alt-A loans (using Fannie's designation). Whereas the disclosed Alt-A loans had a serious delinquency rate that was 2.6 times to 3.6 times higher than the rest of Fannie's loan book.
Or consider another benchmark. If you multiply the serious delinquency rates on Fannie's non-Alt-A loans, the result is still far below the comparable delinquency rates for prime loans nationwide..
The SEC claims that the "true" Alt-A amounts were twice as high as the reported Alt-A amounts. For instance on March 31, 2008, Fannie reported $311 billion in Alt-A loans, and the SEC says that Fannie omitted approximately $323 billion from the total Alt-A amount. But since the "undisclosed" Alt-A loans had a serious delinquency rate that was about half that of the disclosed Alt-A loans, inclusion of those additional loans would have significantly improved the delinquency and default rates for that risk category.
Which is why the SEC will never be able to prove that senior management had the specific intent to deceive investors, or that investors were clearly harmed by by Fannie's categorizations.
For Fatal Flaws In The Lawsuit Against Fannie Mae Execs, Part 1, go here.