Documents: Fannie, Freddie execs ignored warnings

(AP) - Top executives at mortgage finance companiesFannie Mae and Freddie Mac ignored warnings that they were takingon too many risky loans long before the housing market plunged,according to documents

News 12 Staff

Dec 9, 2008, 6:37 PM

Updated 5,704 days ago

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(AP) - Top executives at mortgage finance companiesFannie Mae and Freddie Mac ignored warnings that they were takingon too many risky loans long before the housing market plunged,according to documents released Tuesday by a House committee.
E-mails and other internal documents released by the HouseOversight and Government Reform Committee show that former FannieCEO Daniel Mudd and former Freddie Mac CEO Richard Syrondisregarded recommendations that they stay away from riskier typesof loans.
"Their own risk managers raised warning after warning about thedangers of investing heavily in the subprime and alternativemortgage market. But these warnings were ignored" by the two chiefexecutives, said Rep. Henry Waxman, D-Calif., the committee'schairman. "Their irresponsible decisions are now costing thetaxpayers billions of dollars."
The two companies were seized by government regulators inSeptember. A month later, Freddie Mac asked for an injection of$13.8 billion in government aid after posting a massive quarterlyloss. Fannie Mae has yet to request any government aid but haswarned it may need to do so soon.
Lawmakers questioned Mudd about an internal Fannie Maepresentation from June 2005 that showed the company at a"strategic crossroads," at which it could either delve intoriskier loans or focus on more secure ones.
Questioned about the presentation, Mudd defended his company'seffort to compete against Wall Street banks that were pouring moneyinto subprime and other exotic loans.
"We couldn't afford to make the bet that the changes were notgoing to be permanent," Mudd said.
Mudd and three other former executives of the two companiesdefended their stewardship in a hearing held by the Housecommittee.
"It's important to remember that Freddie and its sisterinstitution, Fannie Mae, did not create the subprime market," saidRichard Syron, Freddie Mac's former CEO.
But Rep. Darrell Issa, R. Calif., blasted Syron and Mudd, alongwith former Fannie Mae CEO Franklin Raines, and former Freddie MacCEO Leland Brendsel.
"All four of you seem to be in complete denial that Freddie andFannie are in any way responsible for this. Your whole excuse forgoing to risky and unreasonable loans that are defaulting at anincredibly high rate is that everyone is doing it. If we don't doit, we'll be left out."
Fannie and Freddie own or guarantee around half the $11.5trillion in U.S. outstanding home loan debt. The two companies arethe engines behind a complex process of buying, bundling andselling mortgages as investments.
They traditionally backed the safest loans, 30-year fixed ratemortgages that required a down payment of at least 20 percent. Butin recent years, they lowered their standards, matching a declinefueled by Wall Street banks that backed the now-defunct subprimelending industry.
Republicans blame Fannie and Freddie, and homeownership policiesof the Clinton administration for sowing the seeds of the financialmeltdown. Democrats defend the companies' role in encouraginghomeownership and stress that Wall Street banks - not Fannie andFreddie - led the dramatic decline in lending standards.
For years the two companies flexed their lobbying muscle inWashington to thwart efforts to impose tighter regulation.
Internal Freddie Mac budget records obtained by The AssociatedPress show $11.7 million was paid to 52 outside lobbyists andconsultants in 2006. Power brokers such as former House SpeakerNewt Gingrich and former Sen. Alfonse D'Amato of New York wererecruited with six-figure contracts.
The more difficult questions, however, will come next year, whenlawmakers weigh what role, if any, the two companies play shouldplay in the mortgage market.
Options include taking the companies private, morphing them intoa public utility or a federal agency, or leaving them asgovernment-sponsored entities that have private shareholders andprofits, with tougher regulations.


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