Fannie, Freddie ignored warnings

The chief executives at mortgage finance companies Fannie Mae and Freddie Mac ignored warnings that they were taking on too many risky loans years before the housing market plunged, according to documents released Tuesday by a House of Representatives committee.

E-mails and other internal documents released by the House Oversight and Government Reform Committee show that former Fannie Mae CEO Daniel Mudd and former Freddie Mac CEO Richard Syron disregarded recommendations that they stay away from riskier types of loans.

“Their irresponsible decisions are now costing the taxpayers billions of dollars,” said committee Chairman Henry A. Waxman (D-Beverly Hills), whose panel reviewed nearly 400,000 internal documents from Fannie and Freddie.

At the hearing, Republicans argued that weak government regulation of Fannie and Freddie and the homeownership policies of the Clinton administration were the key causes of the financial meltdown. “We knew a long time ago that this train was going to crash,” said Rep. Christopher Shays (R-Conn.).

Democrats maintained it was Wall Street banks -- not Fannie and Freddie -- that led the dramatic decline in lending standards that caused mortgages to start defaulting in huge numbers two years ago.

The two companies were seized in September by government regulators. Two months later, Freddie Mac asked for $13.8 billion in government aid after posting a massive quarterly loss. Fannie Mae has yet to request aid but has warned it may need to do so soon.

Fannie and Freddie own or guarantee around half the $11.5 trillion in outstanding U.S. home loan debt. The two companies are the engines behind a complex process of buying, bundling and selling mortgages as investments.

They traditionally backed the safest loans, 30-year fixed-rate mortgages that required a down payment of at least 20%. But in recent years, they lowered their standards, following the cue of Wall Street banks that backed the now-defunct subprime lending industry.

Rep. Carolyn Maloney (D.-N.Y.) grilled Freddie Mac’s Syron about the company’s decision to fire David Andrukonis, Freddie Mac’s former chief risk officer.

Andrukonis sounded warnings as far back as 2004 about the risks posed by loans in which borrowers didn’t provide proof of income or detail their assets, according to e-mails released by the committee.

“Do you regret firing him?” Maloney said. “Do you regret buying these risky loans? Do you regret the way you led -- and I would say mismanaged -- this company?”

Syron said Andrukonis “was fired for a variety of reasons. It was not primarily for his having a view on credit.”

Likewise, lawmakers questioned Mudd about an internal Fannie Mae presentation from June 2005 that showed the company at a “strategic crossroads,” at which it could either delve into riskier loans or focus on more secure ones.

“We couldn’t afford to make the bet that the changes were not going to be permanent,” Mudd said.

Lawmakers were clearly frustrated by what they called a lack of willingness among Syron and Mudd, plus former Fannie CEO Franklin Raines and former Freddie Mac CEO Leland Brendsel, to share any of the blame for the companies’ fortunes.

“All four of you seem to be in complete denial that Freddie and Fannie are in any way responsible for this,” said Rep. Darrell Issa (R-Vista). “Your whole excuse for going to risky and unreasonable loans that are defaulting at an incredibly high rate is that everyone is doing it.”