Fannie Mae and Freddie Mac engaged in “an orgy of junk mortgage development” that turned the two mortgage-finance giants into vast repositories of subprime and similarly risky loans, a former Fannie executive testified on Tuesday.From the Wall Street Journal
The mortgage development, which began in 2005 and lasted until at least last year, happened as senior executives at the two government-sponsored enterprises ignored repeated warnings from internal risk officers that they were delving too deeply into dangerous territory, according to internal documents released at a Congressional hearing in Washington
Arnold Kling, an economist who once worked at Freddie Mac, testified that a high-risk loan could be “laundered,” as he put it, by Wall Street and return to the banking system as a triple-A-rated security for sale to investors, obscuring its true risks.
Charles W. Calomiris, a finance professor at Columbia, testified that nobody saw the crisis coming because the two mortgage giants “adopted accounting practices that masked their subprime and Alt-A lending,” but he did not elaborate.
The former executives at Fannie Mae and Freddie Mac were questioned relentlessly on why they did not see the collapse in housing prices coming and why they ignored warnings from their risk officers about stepping up purchases of nonprime loans.
Fannie Mae and Freddie Mac have long insisted that their involvement with subprime and other nonprime loans has been minimal. Asked about the increased purchases, Mr. Mudd insisted that “Alt-A loans were essentially a subset of overall A loans,” and not subprime.
Executives at Fannie Mae and Freddie Mac clashed over the adequacy of risk controls for several years as the two giant mortgage companies increased their purchases of dicey loans, according to emails released Tuesday at a congressional hearing.From the Los Angeles Times:
The emails show that the two government-backed mortgage companies were aware they were taking on more risk as the housing bubble peaked. But the companies pressed ahead with efforts to regain market share they had lost to Wall Street investment banks. They did so by buying loans and securities that increased their exposure to subprime mortgages, for people with weak credit records, and Alt-A mortgages, which typically spare borrowers from having to document their income and assets.
Fannie "has one of the weakest control processes I ever witness (sic) in my career," Enrico Dallavecchia, then chief risk officer of the company, wrote in a July 2007 email to Michael Williams, chief operating officer. Mr. Dallavecchia, who joined Fannie Mae in 2006, previously had worked for J.P. Morgan Chase & Co. as a risk officer and at the University of Venice in Italy as a researcher.
Mr. Dallavecchia sent his email after being told of a proposed 16% budget cut that would take effect the next year. "This tells me that people don't care about the function or they don't get it," he wrote. In an earlier email, Mr. Williams said: "Given the importance of [the credit risk office], we would expect you to push back and tell us where you need to be next year...I would expect we will need to up the number."
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.From Fox News:
“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.). the Los Angeles Times:
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.”
There is one thing missing — I agree that Henry Waxman was tough on these guys, but he was not tough on the enablers of this guy, namely, members of Congress of his own party — Barney Frank, Chris Dodd, the people who — and some Republicans — who resisted regulation, which the Bush administration, to its credit, wanted to put into effect on the GSEs.From Bloomberg
Freddie and Fannie spent something like $11.5 million on lobbyists, 52 different lobbyists were hired and order to resist regulation, which the Bush administration was seeking.
Now, I'd like to see another hearing where Barney Frank and Chris Dodd come in and explain themselves. Why did you resist this?
One said if it ain't broke, don't fix it. Well, I say we saw today that Fannie Mae and Freddie Mac were broke, broken, and it should have been fixed. And Congress resisted fixing it.
Former Fannie Mae Chief Executive Officer Franklin Raines faulted regulators and housing officials for encouraging the mortgage-finance company and its competitor Freddie Mac to expand into riskier loans with limited oversight.
“It is remarkable that during the period that Fannie Mae substantially increased its exposure to credit risk its regulator made no visible effort to enforce any limits,” Raines, 59, who was ousted in 2004 and accused of accounting manipulation, told the House Oversight and Government Reform Committee in Washington today. Raines’s successor Daniel Mudd, and former Freddie Mac CEOs Richard Syron and Leland Brendsel also testified.
The executives said Congress pressured the companies to finance lower-income borrowers while regulators did little to curb the increasing risk that ultimately led to a government takeover that wiped out most shareholders and potentially saddles taxpayers with a $200 billion tab. James Lockhart, the companies’ regulator, said in September that exerting greater control over Fannie and Freddie was impeded by “their lobbying power.”
“While there could have been better regulation of Fannie Mae and Freddie Mac, it seems that Fannie Mae and Freddie Mac did a lot of things to minimize the regulation,” said John Vogel, a professor at the Tuck School of Business at Dartmouth in Hanover, New Hampshire.
Fannie and Freddie spent a combined $174 million on lobbying the government since 1998, more than General Electric Co., according to the Center for Responsive Politics.