SEC details lawsuits against ex-Fannie Mae, Freddie Mac executives
December 16, 2011
Los Angeles Times
Federal officials said Friday that six former top executives of Fannie Mae and Freddie Mac -- including two former chief executives -- intentionally and repeatedly misled investors about the exposure of the companies to risky subprime loans.
In court papers and at a Washington news conference, Securities and Exchange Commission officials detailed numerous comments -- allegedly misleading -- made by the executives in regulatory filings, at investor conferences, in media interviews and even in testimony before Congress.
The statements were made as Fannie and Freddie were trying to increase their share of the housing finance market as the subprime real-estate bubble was inflating, and then collapsing, between 2006 and 2008, the SEC said.
"Throughout this period, as they were driving up their market share, Fannie, Freddie and their executives sought to maintain the illusion that their business involved minimal and manageable credit risk," said Robert Khuzami, director of the SEC’s Enforcement Division.
The SEC filed the civil suits in New York. The executives named included former Fannie Mae Chief Executive Daniel H. Mudd and former Freddie Mac Chief Executive and Chairman Richard F. Syron.
Also named were Fannie Mae's former chief risk officer, Enrico Dallavecchia, and Thomas A. Lund, former executive vice president of the company's single-family mortgage business. The other Freddie Mac officials were Patricia L. Cook, former executive vice president and chief business officer, and Donald J. Bisenius, former executive vice president for the single-family guarantee business.
The Freddie Mac complaint said that between March 23, 2007, and Aug. 6, 2008, the company told investors that the exposure of its single-family guarantee unit to subprime loans was $2 billion to $6 billion, or 0.1% to 0.2% of its portfolio.
But the SEC said the real exposure started at $141 billion at the end of 2006 and rose to about $244 billion by June 30, 2008 -- 14% of its portfolio.
The court filing quoted Syron as telling an investor conference in New York on May 14, 2007, that “at the end of 2006, Freddie had basically no subprime exposure in our guarantee business.” Three days later, Cook made the same exact statement to an investor conference in London.
Before the speeches, the head of external reporting for Freddie Mac reviewed a draft of Syron’s speech and warned Bisenius and others about the suprime statement.
“We need to be careful how we word this. Certainly our portfolio includes loans that under some definitions would be considered subprime,” Bisenius said, according to the complaint. “We should reconsider making as sweeping a statement as we have ‘basically no subprime exposure.'"
At Fannie Mae, “Mudd was well aware of the company’s increased acquisition of reduced-documentation loans -- indeed, Mudd himself directed the company to pursue that market,” the court filing said.
The SEC complaint quotes Mudd at an April 26, 2006, internal Credit Risk meeting as saying, “The market is moving to low documentation and we need to actively pursue the keys to this market.”
Fannie Mae’s 2006 market share increased from 20% of total mortgage loan originations to 25% by acquiring more subprime and reduced documentation loans. Mudd’s taxable compensation rose in part because of the increased market share, from $6.16 million in 2006 to $10.64 million in 2007.
In a Feb. 23, 2007 call with investors, Mudd said Fannie Mae’s “subprime investment constitutes well below 2 percent of our book,” or about $4.8 billion.
But Fannie Mae was not including “a material number of subprime quality loans ... made to borrowers with weaker credit histories," including one category called expanded approval, or EA, loans.
As of the end of 2006, Fannie Mae’s exposure to those loans was $43.3 billion, the SEC said. Mudd made similar statements to Congress at two hearings in March and April 2007.
"All of the defendants knew that EA loans had higher average serious delinquency rates, a higher level of credit losses and lower average credit scores than the loans Fannie Mae actually included when calculating its disclosed subprime disclosure," said Lorin Reisner, the SEC's deputy director of enforcement, "and EA loans were exactly the type of loans that investors would reasonably expect Fannie Mae to include when calculating its exposure to subprime loans."