Fannie Mae Couldn't Serve Two Masters, Regulators Say

 

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April 9 (Bloomberg) -- Financial Crisis Inquiry Commission Chairman Phil Angelides and Vice Chairman Bill Thomas talk with Bloomberg's Peter Cook and Betty Liu about the panel's hearings into the mortgage-market collapse and ensuing bailouts. (Source: Bloomberg)

 

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April 9 (Bloomberg) -- Paul Miller, an analyst at FBR Capital Markets, talks with Bloomberg's Betty Liu about the outlook for Fannie Mae and Freddie Mac following the mortgage-market collapse. Former Fannie Mae Chief Executive officer Daniel Mudd is among those testifying today before the Financial Crisis Inquiry Commission in Washington. (Source: Bloomberg)

 

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April 9 (Bloomberg) -- Bert Ely, chief executive officer of bank consulting firm Ely & Co., talks with Bloomberg's Margaret Brennan about the structure of Fannie Mae and Freddie Mac. Former Fannie executives Daniel Mudd and Robert Levin testified about Fannie’s role in the housing crisis before the Financial Crisis Inquiry Commission today in Washington. (Source: Bloomberg)

 

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April 9 (Bloomberg) -- Former Fannie Mae Chief Executive Officer Daniel Mudd talks with Bloomberg's Peter Cook about the his strategy to seek profit for the government-sponsored mortgage company. Mudd, currently the chief executive officer of Fortress Investment Group LLC, also discusses factors that led Fannie into conservatorship, the state of the housing market and the need for a definitive charter for government-sponsored enterprises. (Source: Bloomberg)

 

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April 9 (Bloomberg) -- James Lockhart, former director of the Office of Federal Housing Enterprise Oversight, talks with Bloomberg’s Peter Cook about the role of Fannie Mae and Freddie Mac in the mortgage market collapse and his testimony before the Financial Crisis Inquiry Commission today. Lockhart, vice chairman of WL Ross & Co. LLC, also discusses the outlook for a double-dip decline in housing triggered by more foreclosures. (Source: Bloomberg)

 

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April 9 (Bloomberg) -- Mortgage industry consultant Scott Cooley talks with Bloomberg's Matt Miller and Carol Massar about the role of Fannie Mae and Freddie Mac in the finacial crisis. (Source: Bloomberg)

Fannie Mae, the government-backed mortgage company under conservatorship, was toppled by conflict between its mission to foster homeownership and profit demand it faced as a publicly traded company, former regulators said.

Political support for Fannie Mae and Freddie Mac, the biggest sources of U.S. home-loan funding, helped thwart efforts to reform the two companies before losses forced the government takeover in September 2008, Armando Falcon Jr. and James Lockhart said today at a Financial Crisis Inquiry Commission hearing in Washington.

The public-private structure bred “greed, excessive risk taking and abuse,” said Falcon, who oversaw the companies from 1999 to 2005 as director of the Office of Federal Housing Enterprise Oversight. “The companies were not unwitting victims of an economic down cycle or flawed products and services. Their failure was deeply rooted in a culture of arrogance,” he said.

The commission, mandated by Congress to produce a report by the end of this year on the causes of the financial crisis, is holding a third day of hearings this week to examine the impact of the mortgage market’s collapse. Commission Chairman Philip Angelides, 56, said today’s session would shed new light on the failures of Washington-based Fannie Mae and Freddie Mac of McLean, Virginia.

Maintaining Balance

Maintaining balance between the government-imposed mission of promoting homeownership and maintaining profitability as a publicly traded company became increasingly difficult amid competition in the mortgage market, said Daniel Mudd, Fannie Mae’s chief executive officer from 2005 until the U.S. takeover.

Fannie Mae began increasing its investment in specialized mortgages including subprime loans in 2006, after its market share of residential mortgages fell to less than 24 percent from a high of more than 40 percent, Mudd told the panel.

“It became clear that the movement toward nontraditional products was not a fad, but a growing and permanent change in the mortgage marketplace,” said Mudd, 51. “By 2006, Fannie Mae was engaged in a continual struggle to balance all of the requirements of the public mission, along with all of the duties owed to the shareholders.”

‘Unknown Risk’

Commission members questioned Mudd about Fannie Mae’s decision to expand purchases and guarantees of non-traditional mortgage such as subprime and so-called Alt-A loans in light of a 2005 internal planning memo that pointed to an “increased exposure to unknown risk.”

Commissioner Keith Hennessey, a former economic adviser to President George W. Bush, said the company’s jump into alternative loans “contributed to the housing bubble.”

Purchases of the loans, which accounted for 27 percent of the company’s portfolio and 58 percent of its losses by 2007, were aimed at rebuilding market share and fulfilling the mission of increasing homeownership among lower-income borrowers, Mudd told the panel.

“I cannot make any apologies for trying to earn a profit while I was at Fannie Mae,” he said.

Lockhart, who oversaw Fannie Mae from 2006 to 2009 as head of Ofheo and the Federal Housing Finance Agency, said he lacked political or legal authority to control the massive entity, which Congress created in 1938 to foster homeownership.

The public mission “allowed the companies to be so politically strong that for many years they resisted the very legislation that might have saved them,” Lockhart said.

To contact the reporter on this story: Lorraine Woellert in Washington at lwoellert@bloomberg.net.