The executives who were at the helm of Fannie Mae and Freddie Mac at the time the two secondary lenders collapsed have been named as defendants in a government lawsuit. The defendants, one who is the current chief executive of Fortress Investment Group LLC, are accused of hiding their exposure to higher-risk loans.
During the darkest days of the financial crisis in September 2008, the newly formed Federal Housing Finance Agency seized control of the Federal National Mortgage Association and the Federal Home Loan Mortgage Corp. At the time, Daniel H. Mudd was chief executive officer at Fannie and Richard F. Syron was chairman and CEO of Freddie.
Mudd took over at Fannie in June 2005 after filling in as interim chief upon the departure of Franklin D. Raines in December 2004. Mudd, who along with Syron was terminated when the two firms were placed into conservatorship, has since gone on to become CEO of Fortress Investment Group LLC — parent of Nationstar Mortgage LLC.
During their tenure at the two government-controlled enterprises, Mudd and Syron misled their respective investors about their companies’ levels of higher-risk mortgage holdings, according to two separate federal lawsuits filed in Manhattan. They allegedly misstated their subprime mortgage holdings in public filings, investor calls and media interviews. Fannie is additionally accused of masking the degree of its Alt-A exposure.
The SEC claims the deception at Fannie occurred between 2006 and 2008, while the time frame was between March 2007 and August 2008 at Freddie.
In addition to Mudd, former chief risk officer Enrico Dallavecchia and former executive vice president Thomas A. Lund are named as defendants in the complaint alleging securities fraud at Fannie.
Syron is joined by former Freddie executives Patricia L. Cook and Donald J. Bisenius as defendants in the lawsuit alleging investor fraud at Freddie.
“Fannie Mae and Freddie Mac executives told the world that their subprime exposure was substantially smaller than it really was,” Robert Khuzami, director of the SEC’s enforcement division, said in a news release Friday.
The SEC alleges that Fannie reported its single-family subprime exposure was only 0,2 percent as of Dec. 31, 2006. That worked out to around $4.8 billion in loans “made to borrowers with weaker credit histories.”
But Fannie excluded more than $43 billion in “expanded approval” loans that were “specifically targeted by Fannie Mae towards borrowers with weaker credit histories,” the complaint alleges.
In addition, while Fannie reported its Alt-A exposure at 11 percent of its portfolio as of March 31, 2007, the SEC claims that Alt-A actually accounted for 18 of the company’s single-family holdings. The disclosure was made with the blessing of Mudd.
Messrs. Mudd, Dallavecchia and Lund were motivated by a desire for bigger market share, the SEC said.
Syron and Cook allegedly led investors to believe that Freddie’s single-family business had “basically no subprime exposure.”
“Unbeknown to investors, as of Dec. 31, 2006, Freddie Mac’s single family business was exposed to approximately $141 billion of loans internally referred to as ‘subprime’ or ‘subprime like,’ accounting for 10 percent of the portfolio, and grew to approximately $244 billion, or 14 percent of the portfolio, as of June 30, 2008,” the SEC said.
Both Fannie and Freddie entered into a non-prosecution agreement with the SEC. The pair agreed to accept responsibility for their conduct and not dispute, contest, or contradict an agreed-upon statement of facts — though neither firm admitted or denied liability. The pair will cooperate with the agency in the litigation.
McLean, Va.-based Freddie issued a statement indicating that the SEC will not initiate an enforcement action against it or require it to pay a monetary penalty.
Fannie made a filing with the SEC on Friday that said, “Subject to Fannie Mae’s full, truthful and continuing cooperation and compliance by Fannie Mae with its obligations under the agreement, the SEC agreed not to bring any enforcement action or proceeding against Fannie Mae arising from the investigation.”
The SEC said it is seeking financial penalties and for the executives to return ill-gotten gains. A permanent injunction is also sought barring the defendants from being an officer or director of a publicly traded company registered under Section 12 of the Securities and Exchange Act of 1934.
“In entering into these agreements, the commission considered the unique circumstances presented by the companies’ current status, including the financial support provided to the companies by the U.S. Treasury, the role of the Federal Housing Finance Agency as conservator of each company and the costs that may be imposed on U.S. taxpayers,” the SEC said in its statement.
