Why Were Mortgage Warnings Ignored?
The Freddie Mac warning wasn't the only mortgage prediction to be dismissed.
Aug. 6, 2008 — -- Why didn't early warnings stop the rush to invest in risky mortgages? It's a question some are asking this week in light of news that the chief executive of mortgage giant Freddie Mac may have dismissed concerns raised in 2004 about an impending housing crisis.
The New York Times reported on Tuesday that Freddie CEO Richard Syron failed to follow advice by David A. Andrukonis, the company's former chief risk officer, who warned that the loans bought by the company "would likely pose an enormous financial and reputational risk to the company and the country."
Freddie Mac, which on Wednesday morning posted a second-quarter loss of $821 million, released a statement calling the Times story "superficial" and defending its record, saying that its "mortgage default and credit loss rates are a fraction of the industry averages."
Other early – and, apparently, overlooked – warnings have also made headlines. The Times reported in December that Federal Reserve governor Edward Gramlich, who died last fall, had warned about the risks of subprime mortgages – home loans made to high-risk borrowers -- as early as 2001. Reuters reported in October that a Merrill Lynch analyst concluded in 2006 that companies could suffer as a result of their subprime investments.
Why weren't these and other warnings enough to ward off the mortgage mess? Experts told ABCNews.com that several factors kept the key players in the mess – financial firms – from pulling back.
Money: Syron received $18.3 million in compensation last year. Daniel Mudd – the CEO of the country's other mortgage giant, Fannie Mae – received $11.6 million. Stanley O'Neal, former chairman and CEO of Merrill Lynch, Charles Prince, the former chairman and CEO of Citigroup and Angelo Mozilo, the former chairman and chief executive officer of Countrywide Financial Corp., all also earned tens of millions at their posts.
CEOs weren't the only ones raking it in: Lower-ranked finance types involved in structuring mortgage investments also saw big paydays. Those short-term gains, said Robert E. Wright, a finance historian at New York University's Stern School of Business, made the long-term risks worth it.
