Executives At Fannie Mae, Freddie Mac Ignored Warnings Of Subprime Risks
Top executives of Fannie Mae and Freddie Mac faced intense questioning on Dec. 9 by members of the Committee on Oversight and Government Reform over their role in the collapse of the two mortgage giants. Lawmakers grilled former Fannie Mae CEOs Daniel Mudd and Franklin Raines and former Freddie Mac CEOs Richard Syron and Leland Brendsel on why the companies ignored previous warnings about the potential problems of subprime mortgages and continued to buy up risky subprime and Alt-A loans.
As expected, finger pointing was in full force. During the hearing, Henry Waxman, chairman of the Oversight and Government Reform Committee, quizzed Fannie Mae’s former CEO Mudd about a June 2005 document citing the company was at a “strategic crossroads” and could either delve into riskier loans or focus on more secure ones. According to the document, the real “revenue opportunity” was in buying subprime and other alternative mortgages.
The document went on to say that homes were “being utilized … like an ATM.” It also acknowledged that investing in subprime and alternative mortgages would mean “higher credit losses” and “increased exposure to unknown risks.”
Other documents presented during the hearing made it clear that both Fannie Mae and Freddie Mac knew what they were doing as they took on added risks. Their own risk managers repeatedly raised concerns about the dangers of investing heavily in the subprime and alternative mortgage market.
In 2004, Freddie Mac’s chief risk officer, David Andrukonis, sent an e-mail to CEO Richard Syron urging the company to stop purchasing loans with no income or asset requirements “as soon as practicable.” The risk officer further warned that mortgage lenders were targeting “borrowers who would have trouble qualifying for a mortgage if their financial position were adequately disclosed” and that the “potential for the perception and the reality of predatory lending with this product is great.”
Syron did not heed any of the recommendations. Instead, he fired Andrukonis.
Questioning of the CEOs and others lasted more than four hours. Besides finger pointing, little was resolved in the end. Rep. Darrell Issa of California offered perhaps the most fitting comment of the day when he chastised the former Fannie Mae and Freddie Mac CEOs with the following comment:
“All four of you seem to be in complete denial that Freddie and Fannie are in any way responsible for this. Your whole excuse for going to risky and unreasonable loans that are defaulting at an incredibly high rate is that everyone is doing it.”
Our affiliation of securities lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses.
