Lawmakers blast former Fannie, Freddie execs

Lawmakers blamed former top executives at the companies for fueling the financial market turmoil that has dragged the country into a recession.

Three months after the government seized control of mortgage giants Fannie Mae and Freddie Mac, lawmakers blamed former top executives at the companies for fueling the financial market turmoil that has dragged the country into a recession. And the housing fallout continues. The National Association of Realtors' index of pending US home sales beat expectations in October - but deeply discounted foreclosures and distressed sales accounted for nearly half the deals. In Congress, a special panel charged with overseeing the government's $700 billion bailout of the financial sector challenged the Bush administration's spending decisions and said Treasury officials needed to explain their reluctance to use the money to reduce the number of foreclosures, according to a draft report from the panel. Internal e-mails and other documents released by the House Oversight and Government Reform Committee on Tuesday show that former Fannie Mae CEO Daniel Mudd and former Freddie Mac CEO Richard Syron disregarded recommendations that they avoid riskier types of loans. "Their irresponsible decisions are now costing the taxpayers billions of dollars," said Democratic Rep. Henry Waxman, chairman of the committee, which reviewed nearly 400,000 internal documents from Fannie and Freddie. Republicans argued that the primary causes of the financial meltdown were weak government regulation of Fannie and Freddie and Clinton administration policies to promote homeownership. "We knew a long time ago that this train was going to crash," said Rep. Christopher Shays, a Republican. Democrats acknowledged that the two government-sponsored companies contributed to the financial crisis. But they stressed that Wall Street banks - not Fannie and Freddie - led the dramatic decline in lending standards that caused mortgages to start defaulting in huge numbers two years ago. Two months after federal regulators seized the two companies in September, Freddie Mac asked for an injection of $13.8b. in government aid after posting a huge quarterly loss. Fannie Mae has yet to request any government aid but has warned it may need to do so soon. Fannie and Freddie own or guarantee around half the $11.5 trillion in US outstanding 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 percent. But in recent years, they lowered their standards, matching a decline fueled by Wall Street banks that backed the now-defunct subprime lending industry. Lawmakers pressed Mudd about an internal Fannie Mae presentation from June 2005. It showed the company at a key juncture. Its competitors on Wall Street were starting to reap lucrative fees on investments backed by risky loans. Fannie Mae had to decide whether to compete in that market or take the less risky, but also less profitable, path. Fannie Mae executives worried at the time about "becoming a niche player" and "becoming less of a market leader" at the time, according to the confidential internal presentation, which noted that mortgage securities sold by Wall Street investors exceeded those sold by Fannie Mae for the first time in 2004. With competitors entering the market, Mudd said, "we couldn't afford to make the bet that the changes were not going to be permanent." Lawmakers, in questioning that lasted more than four hours, were frustrated by what they called a lack of willingness among Syron and Mudd, plus former Fannie Mae 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, a Republican. "Your whole excuse for going to risky and unreasonable loans that are defaulting at an incredibly high rate is that everyone is doing it." Repeated attempts to impose tighter regulation of the two companies were thwarted by the companies' powerful lobbyists. The companies, which are now banned from lobbying, spent nearly $177 million on lobbying over the past 20 years, according to the Center for Responsive Politics. Raines defended his company's lobbying, saying "Fannie Mae, like any other corporation owned by shareholders, came to Congress and expressed its views." The more difficult questions, however, will come next year, when lawmakers will weigh what role, if any, the two companies should play in the mortgage market Options include taking the companies private, morphing them into a public utility or a federal agency, or leaving them as government-sponsored entities that have private shareholders and profits, with tougher regulations. On Wednesday, the House Financial Services Committee scheduled a hearing on the Troubled Asset Relief Program, the $700b. rescue package for financial institutions, amid mounting criticism over the Bush administration's stewardship of the program. Members of a congressional oversight panel were to testify before the committee. A draft of their report, which was to be made public Wednesday, posed 10 pointed questions to the Treasury Department regarding its decision to inject capital into banks, whether the banks were living up to their end of the bargain and whether more should be done to halt the rising number of foreclosures. While the panel reached no specific conclusions, the tone of the questions was skeptical and echoed some of the criticism raised in a Government Accountability Office audit of the program last week. "The American people need to understand Treasury's conception of the problems in the economy and its comprehensive strategy to address those problems," the draft report says. The report noted that Treasury was considering having Fannie Mae and Freddie Mac guarantee and purchase mortgages with rates as low as 4.5% for a 30-year fixed mortgage. But the report said the program was designed only to encourage new home buyers. "The program does not appear to offer any help to already distressed homeowners," the draft said. The House Republican appointee on the panel, Rep. Jeb Hensarling of Texas, who opposed the initial TARP fund, declined to sign the report. He said he had raised several concerns with the panel over access to resources and other issues that "have not yet been addressed." The report comes as the Bush administration is considering seeking access to the second half of the $700b. fund. With Congress wary and with reviews such as these, the administration faces an uphill effort.