Ex-leaders of Fannie Mae questioned

Two disparate portraits of Fannie Mae — one as the victim of an unprecedented dislocation in the housing market, the other as an example of a deeply rooted culture of arrogance and greed — were presented to the Financial Crisis Inquiry Commission on Friday, as the commission wrestled with the causes and consequences of the housing crisis.

On the third day of the commission’s latest round of hearings, Robert Levin, former executive vice president and chief business officer of Fannie Mae, told the commission that the stresses that buffeted Fannie Mae during the housing crisis “would have been difficult for the company to withstand regardless of any business decisions that preceded the crisis.”

In September 2008, the federal government stepped in and seized control of Fannie Mae and Freddie Mac, the mortgage lending giants.

Phil Angelides, chairman of the commission, asked the Fannie Mae executives why they decided to dive so aggressively into the high-risk market that ultimately was the company’s undoing.

The Fannie Mae executives replied that in trying to balance the company’s charter as both a for-profit private company and a government-sponsored enterprise dedicated to meeting public policy goals for the financing of affordable housing, the company was sometimes forced to drive the market rather than simply participate in it.

Different standards

“This required the company to engage in affirmative efforts, including outreach programs and application of different underwriting and pricing standards, to create business to help us meet the goals,” Levin said.

Daniel Mudd, former chief executive of Fannie Mae, told the commission that balancing those goals “became impossible,” because the company was in many cases “faced with a choice between unsavory alternatives.”

“I could not leave the market, close the window or short mortgages,” Mudd said, referring to the practice of betting that housing prices and loan values would decline.

“There have been suggestions that Fannie Mae subordinated its mission to the pursuit of higher profitability, but I beg to differ,” Mudd said in prepared remarks. The company “filled the vacuum left when the private sector fled the market in the face of this crisis.”

He added: “I hope the good that was done will not be forgotten as we weigh the lessons of 2008.”

Absent a new way of thinking about how the government can promote homeownership, Mudd said, there is no way to escape the fact that “government entities created to support homeownership as a social good will tend to socialize the risk to all taxpayers.”

Regulatory officials who were charged with overseeing Fannie Mae, however, also were scheduled to testify later Friday that the companies were not victims of an economic down cycle.

‘Political attacks’

“Their failure was deeply rooted in a culture of arrogance and greed,” Armando Falcon, former director of the office of Federal Housing Enterprise Oversight, said in prepared testimony submitted to the commission. The company’s executives and supporters repeatedly used lobbyists and political support to subject the regulators to “malicious political attacks and efforts of intimidation,” he said.

Those efforts included blocking examinations of Fannie Mae’s business or undermining reports on its shortcomings, he said. As Fannie Mae suffered a drop in profitability as other portions of the mortgage market grew more quickly than Fannie Mae’s, he said, the company decided to begin investing in subprime assets.

“This certainly accelerated their demise,” he said, “when the housing bubble burst.”
Source: Houston Chronicle