All hemming and hawing aside over a large quarterly loss at Fannie Mae (FNM) posted Friday -- one that, it should be noted, was the result of aggressive reserving for future losses -- it's pretty clear that the GSE now faces the proverbial piper over its foray into Alt-A mortgages in the past few years. Fannie said Friday that it would exit the Alt-A business altogether by the end of the year, as a result. From the start of 2006 until the third quarter of 2007, Alt-A loans represented 20 percent or more of Fannie Mae's mortgage acquisitions; the GSE purchased $25 billion or more each quarter in Alt-A mortgages until the market for low-doc, no-doc and other non-traditional loans began to dry up towards the back half of last year (and the GSE implemented several eligibility and pricing increases). During the second quarter, Alt-A represented just below 5 percent of acquisition volume and barely more than $5 billion -- still plenty of dollars, to be sure, but nowhere near what was observed during 2006 and 2007. But any changes purchase/underwriting criteria still clearly came far too late to prevent the GSE from taking a direct credit hit, now that the Alt-A mortgage class is the latest area of mortgages to go through a meltdown, and many borrowers are defaulting at a seemingly parabolic rate each month and each quarter. For its part, Fannie had roughly $307 billion in Alt-A mortgages remaining on its books (UPB) at the end of the second quarter, or 11.5 percent of the GSE's entire mortgage book. And there can be little doubt that Alt-A is the source of much of Fannie's actual credit costs during the quarter, either -- Alt-A mortgages represented a stunning 49.6 percent of the company's $1.6 billion in credit costs booked in Q2. It's not hard to see why, either: Fannie holds $8.6 billion in option ARM mortgages and another $92 billion in interest-only mortgages, which together comprise roughly one-third of the Alt-A book at the company. Sliced differently, $100 billion of the Alt-A mortgage book is in California and Florida alone, two states that have seen median home prices slide dramatically throughout the past year. Thirty percent of REO acquisitions by Fannie during the first six months of 2008 were tied to foreclosures on Alt-A mortgages; Fannie held 54,173 REO properties in inventory at the end of the second quarter. Pain for BofA? Mounting losses have Fannie taking a hard look at its Alt-A book of business, and in a press statement the company said it would be "ramping up defaulted loan reviews to pursue recoveries from lenders, focusing especially on our Alt-A book." The GSE said it would increase post-foreclosure loan reviews from 900 per month in January to a targeted 4,000 each month by the end of this year; the company also will double its anti-fraud investigations this year, and said it expected the efforts to increase recoveries this year and next. The strategy isn't all that surprising, as nearly anyone in the mortgage business these days is looking for a reason to push the bad loans -- and the losses associated with them -- off of their books, and onto someone else's. And in the case of Alt-A, there's likely to be more than a just a fair amount of income misrepresentation, among other sorts of fraud. But Fannie's new, stern tack on limiting Alt-A losses in an effort to protect capital should give pause as to just who Fannie Mae expects to force repurchases from; and you need look no further than North Carolina-based Bank of America Corp. (BAC) for evidence here. After completing its purchase of Countrywide Financial Corp. on June 30, Bank of America now services roughly 28 percent of Fannie Mae's single-family mortgage credit book of business, meaning the GSE new-found commitment to due diligence and loan-level forensics may end up pushing a good number of defaulted Alt-A loans into BofA's proverbial lap. But HW's sources suggest that BofA isn't the only Alt-A lender/servicer looking at possible repurchases. "By far the two biggest sellers of Alt-A to Fannie were Countrywide and IndyMac," said a senior banking executive that spoke with HW on condition of anonymity. "And it's ironic to think that Fannie could potentially stick repurchases into the FDIC's lap." Ironic, indeed. The FDIC has been operating IndyMac Federal Bank FSB in the wake the thrift's failure on July 13; it's unclear if Fannie would be able to put back Alt-A defaults with the FDIC's version of the bank, especially in the wake of a recent bankruptcy filing by the former bank holding company IndyMac Bancorp Inc., or if the FDIC would be required to honor such repurchase demands should they arise. Disclosure: The author held no positions in FNM or BAC when this story was published; indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.