The former heads of Fannie Mae and Freddie Mac told Congress on Tuesday that the firms bought questionable mortgages to keep pace with rivals despite subordinates' repeated warnings of risks to the companies, borrowers and the economy.
"If it had not done so, it could not have remained competitive in or even relevant in the residential mortgage market," former Freddie Mac CEO Richard Syron told the House Oversight and Government Reform Committee.
But panel members lambasted the executives for taking undue risks to win bigger bonuses and for failing to take responsibility for a housing crisis that has ravaged the economy.
"Their irresponsible decisions are now costing taxpayers billions of dollars," said committee Chairman Henry Waxman, D-Calif.
Fannie and Freddie own or guarantee half of outstanding home loans and became the largest buyers of subprime and Alt-A mortgages, both of which have had high rates of defaults. Alt-A, a category between subprime and prime, did not require documentation of income or assets. With the firms facing $12 billion in credit losses this year, the government took over both in September.
They traditionally have backed safer, conventional mortgages but felt pressured to join an alternative-mortgage wave led by Wall Street banks. A June 2005 Fannie Mae internal document, released by the committee, cautioned the risks of investing in such loans included "growing concern about housing bubbles." Noting the firm could face "higher credit losses," it advised against the strategy.
Yet with subprime loans soaring, former Fannie Mae CEO Daniel Mudd told lawmakers, "We couldn't afford to make the bet that (market) changes were not going to be permanent."
In a July 2007 e-mail to Mudd, Fannie's chief risk officer, Enrico Dallavecchia, said the company didn't have proper controls for credit risks. Still, his budget was cut 16%. "Do I look so stupid?" he asked.
Mudd said budget cuts "applied across the company," driven by the need for more capital.
Freddie Mac's former chief risk officer, David Andrukonis, warned in a 2004 e-mail that the company should stop buying Alt-A loans. Lenders, he said, were targeting "borrowers who would have trouble qualifying for a mortgage if their financial position were adequately disclosed." He was fired.
Syron said he was fired for "a variety of reasons, and it wasn't primarily for having views on credit."
The executives lamented that they had to balance often-conflicting goals, including satisfying shareholders, meeting Congress' mandate for affordable housing and stabilizing the market.
"All of you are getting paid millions of dollars a year and yet you had nothing to do with Fannie and Freddie going south," said Rep. Lynn Westmoreland, R-Ga. "(Your) job was rearranging the deck furniture on the Titanic as it went down."
Said Mudd, "In retrospect, would you have as much exposure in Alt-A? No, we wouldn't."