More than three years after their September 2008 government takeover, mortgage giants Fannie Mae and Freddie Mac are  back in the news.

Just last week, the inspector general of the Federal Housing Finance Agency, which regulates the pair, reported that Fannie has had to ante up nearly $100 million to defend three former officials of the companies—including Fannie’s ex-CEO Franklin Raines—as a result of an accounting-fraud scandal that erupted in 2004. This of course, has become the U.S. taxpayer’s burden.

The allegations paint a picture of executives hell-bent on loading their companies with shaky loans to boost their bonuses.

Then there’s the fierce debate among conservatives and liberals over whether Fannie and Freddie were primarily responsible for the Great Recession by making home loans to low- and moderate-income folks who couldn’t afford the payments—or whether the culprit was Wall Street, which fueled the housing market by securitizing the risky subprime and alt-A (aka low-documentation or liar) loans that produced most of the mortgage defaults and credit losses.

OVERARCHING ALL OF THIS are two security-fraud complaints filed late last year by the Securities and Exchange Commission in the U.S. district court in Manhattan. The agency is charging, among others, Daniel Mudd, another former Fannie CEO, and Richard Syron, his counterpart at Freddie, with a variety of civil offenses connected to the 2008 collapse that pushed their companies into government conservatorship. The underlying motive for the alleged misdeeds was greed, the agency asserts. Both the companies’ stock prices and their executives’ bonuses were linked to financial results. The more mortgages processed, the better the reported numbers would be.

The complaints, backed by various statements of fact agreed to by Fannie and Freddie in accompanying non-prosecution agreements, paint a sordid picture of what went on at the two government-sponsored enterprises from 2005 until their collapse in September 2008.

The allegations, although couched in bloodless prose, paint a picture of executives hell-bent on loading up their companies with high-fee subprime and alt-A mortgage guarantees, while hiding from investors, regulators and even Congress the outsize risks involved. The effort allegedly involved shenanigans such as mislabeling mortgages as prime that clearly weren’t and systematically debauching decades-old credit standards for acceptable mortgages, such as an 80% loan-to-value maximum and a strong FICO credit score for borrowers.

Neither Mudd nor Syron would speak with Barron’s for this article. But Syron’s lawyer, Thomas Green of SidleyAustin LLP, called the charges against his client “senseless.” He added that, during Syron’s tenure, Freddie Mac had been scrupulous in “disclosing information about the character of all the loans in its single-family portfolio. There was no inadequate disclosure.” Daniel Mudd’s lawyer was unavailable for comment about the SEC case. But Mudd has said he didn’t attempt to mislead anyone and that the government had all the relevant information on Fannie’s loan book. Syron asserts that Freddie wasn’t the victim of wrongdoing, but rather of a once-in-a-century home-price collapse.

The complaints focus on Fannie and Freddie’s primary business: guaranteeing interest and principal payments on single-family home mortgages they buy from lenders throughout the U.S., and then repackage into “agency securities” sold to investors worldwide. The guarantee remains attached to individual mortgages throughout their lives in securitization. The two agencies’ single-family portfolios account for over half of their combined $5.3 trillion book of business.

The SEC alleges that mislabeling dramatically understated the extent of both companies’ exposure to subprime and alt-A mortgages. Fannie, for example, claimed in its second-quarter 2008 report, issued just a month before the company’s seizure, that its alt-A mortgages accounted for only $306 billion of its guarantee exposure, when the real number was $647 billion, the SEC says.

Fannie was able to fudge the number, contends the complaint, because it pre-arranged with many alt-A lenders to code only a certain percentage of their alt-A loans with that designation. When a lender screwed up, which the complaint claims happened occasionally, it would draw a rebuke from Fannie, which would accept the loans only after the lender dropped the alt-A tag. The SEC states that the company euphemistically referred to mislabeled mortgages as “lender-selected loans.”

ACCORDING TO THE SEC COMPLAINT, there were yawning gaps between Freddie’s reported and actual subprime and alt-A exposures. By the second quarter of 2008, Freddie was claiming in filings that subprime comprised an infinitesimal $2 billion to $6 billion, or less than 0.2%, of its total single-family book, when the real number was an estimated $244 billion, or 14%. Just before Freddie’s collapse, alt-A had grown to $541 billion, or 30% of the book, rather than the officially reported $188 billion, or 10%.

Bizarrely, the SEC reports, beginning perhaps in 2004, Freddie began to buy mortgages that had passed muster on Fannie’s automated underwriter system, Desktop Underwriter, instead of using its own Loan Prospector. The SEC alleges that Freddie preferred Underwriter because it generated more mortgage-purchase approvals as a result of its looser FICO credit and loan-to-value standards. By 2007, Freddie was getting more loans (31%) via Fannie’s system than its own (27%).

In their heyday, before being seized, Fannie and Freddie embraced pell-mell growth. And why not? Shareholders wanted growth and the higher stock prices that it typically fuels, and that’s what earned the managers big bucks from stretch-goal bonuses and the like. Periodic genuflection to the companies’ supposed social mission—cheap mortgages for all deserving Americans regardless of income status—camouflaged greed.

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