WASHINGTON — If there was any chance that lawmakers might eventually seek to return Fannie Mae and Freddie Mac to their hybrid public-private status, that idea was dealt a death blow Friday during a hearing of the Financial Crisis Inquiry Commission.
The hearing, which featured Fannie's former executives and regulators, described a company that took unnecessary risks in an attempt to chase profits and preserve market share, while lobbying Congress to keep its regulator weak and ineffective.
In retrospect, even Daniel Mudd, Fannie's president and chief executive when it was seized by the government in September 2008, acknowledged the situation was untenable. The government-sponsored enterprise started buying more alternative mortgages, despite their riskiness, in an effort to keep pace with the market and fulfill its statutory affordable housing goals. "The root cause of the GSEs' troubles lies with their business model," Mudd told the 10-member bipartisan panel. "I wish I could have maintained the delicate balance of roles assigned to Fannie Mae, and I am sorry that I could not."
The GSEs were unique in many ways, having been chartered by Congress with government ties, including a line of credit with the Treasury Department and affordable housing goals to promote homeownership by low and middle-income borrowers. But they were also publicly held companies that attempted to keep pace with or exceed Wall Street expectations.
Mudd said that since Fannie could never get out of the mortgage business, it was trapped once the market began to implode. "I could not do what a private firm could do: leave the market, close the window or short mortgages."
Robert Levin, a former executive vice president and chief business officer, testified that Fannie began buying riskier mortgages because it was losing market share.
"We were concerned about losing relevance in the marketplace," he said. "It seemed more likely that huge [private-label securities] and alt-A markets might be permanent fixtures of the market, as opposed to temporary phenomena."
But former regulators said Fannie's problems went beyond buying risky mortgages. Fannie lobbied Congress for years to keep its regulator weak, they said.
"The companies were not unwitting victims of an economic down cycle or flawed products and services of theirs," said Armando Falcon Jr., the former director of the Office of Federal Housing Enterprise Oversight, the GSEs' regulator until it was replaced in 2008 by a new agency. "Their failure was deeply rooted in a culture of arrogance and greed."
As lawmakers begin debate on how best to restructure or replace the GSEs, both Falcon and James Lockhart, another former director of OFHEO and the first director of its successor, the Federal Housing Finance Agency, said the previous model was a disaster.
"We cannot go back to that kind of model," Falcon said.
Lockhart added: "The GSE model was flawed. It didn't work, and it needs to be totally restructured."
Several panelists, including Byron Georgiou, noted that Fannie spent $80 million between 1998 and 2008 lobbying Congress, including an initiative to weaken legislation creating the FHFA. Panelists also said Fannie's compensation policies encouraged risk-taking. Total compensation of the top four executives at Fannie Mae and Freddie Mac exceeded the entire OFHEO budget for the years between 2000 and 2003, which ranged between $19 million and $30 million. Executives received total compensation of $33.6 million in 2000, which ballooned to $51.5 million by 2003.
"It sort of dwarfs the ability of the regulator to really play a significant role," Georgiou said.
The hearing was the third last week for the commission, which featured testimony from former executives of Citigroup and its regulators. But where previous witnesses offered broad apologies for their mistakes, Mudd went a step further. "I want to be clear: I was the CEO of the company, and I accept responsibility for everything that happened on my watch," he said.
