Fannie Mae is supposed to be prime, but it turns out that much of its loan book is made up of less than perfect credit.

Forbes reports that yesterday “Fannie Mae executives told analysts that 43.0%, or $946 million, of the $2.2 billion in losses incurred during the first quarter involved Alt-A loans. They also said that the company’s ‘Alt-A book will continue to drive an outsize portion of our overall credit losses.’

Alt-A loans appeal to lenders because they yield higher rates on prime classified mortgages and are backed by borrowers with stronger credit ratings than subprime borrowers. But they carry extra risk for lenders due a lack of documentation–including limited proof of the borrower’s income.

“The US housing finance system needs replacing,” says Martin Hutchinson.

“The mortgage broker’s incentive is to maximize loan volume — pretty much regardless of whether or not the borrower can afford the loan. Falsification of documents, suborning of appraisers, and other similarly reprehensible machinations becomes a normal course of action in such a situation, as does turbo-charging the housing market to valuation and sales levels it cannot sustain. A system in which prices are forced up to unsustainable levels and fraud is rampant is broken, and needs to be replaced with something better.”