To hear a former senior Fannie Mae executive tell it, the mortgage finance giant’s dive into questionable mortgages during the housing boom arose because the company felt compelled to compete against Wall Street.

In testimony before the Financial Crisis Inquiry Commission on Friday, Robert J. Levin, Fannie’s former chief business officer, said that Fannie risked losing its “relevance” in the market if it didn’t ply in riskier mortgages.

The rest of the story is well-known at this point: Fannie acquired billions of dollars in risky mortgages, most of which went sour, precipitating its momentous move into government conservatorship.

With the rise of unregulated private-label securities, mortgage-backed instruments issued by Fannie competitors, the market share of bonds from the government-sponsored entities diminished rapidly, falling to 23 percent in 2006 from 45 percent in 2003. Fannie, according to Mr. Levin, could not ignore grabbing a piece of the growing market, even if it involved riskier subprime and Alt-A loans.

“By the beginning of 2006, it became harder to justify a position of no change.” Mr. Levin said. “Fannie Mae’s volume of business relative to the market continued to decrease to a level where we were concerned about losing relevance in the marketplace.”

Fannie began by investing in Alt-A mortgages, as well as in the AAA-rated portion of securities backed by subprime loans.

Competition posed another problem for Fannie, Mr. Levin said. It sharply lessened the G.S.E.’s ability to influence market activity. That was a concern because lessened market power would have marginalized Fannie’s goal of maximizing profits for shareholders and promoting home ownership.

Moreover, by not participating in the riskier part of the mortgage market, Fannie would have had more difficulty fulfilling another mandate, providing government assistance to low-income buyers.

“P.L.S. posed a number of threats to the company,” Mr. Levin explains. “A financial threat, because there was simply less business coming into our market which was going to another market. It posed a mission threat, because many of the products that we financed by P.L.S. have affordability features, and so it threatened our ability to meet out government-mandated housing rules.”

Fannie would acquire billions of dollars of the dodgy mortgages, feeding investor demand and ultimately contributing to the housing bubble.

“With the benefit of hindsight, had we anticipated the oncoming market meltdown, we would have been far less likely to expand our involvement into these nontraditional products,” Mr. Levin said.

Fannie Mae reported $134 billion in net losses in 2008 and 2009, most of which were related to credit-related loan losses. National home ownership has fallen to 67 percent as a result of the crisis, down from its all-time high in 2004 of 69 percent.

– Cyrus Sanati

Go to Robert Levin’s Prepared Remarks (PDF) »