Fannie Mae and Freddie Mac executives went on the hot seat today over the mortgage meltdown as House members criticized them for ignoring warnings about risky mortgages.
Former Freddie Mac chief executives Leland Brendsel and Richard Syron and former Fannie Mae chief executives Daniel Mudd and Franklin Raines were at Capitol Hill for the House Oversight and Government Reform Committee hearing on the causes of the companies' meltdown.
"All four of you still seem to be in complete denial that Freddie and Fannie are, in any ways, responsible for this," Rep. Darrell Issa, R-Calif., said. "Your whole excuse for going to risky and unreasonable loans that are defaulting at an incredibly high rate is, everyone is doing it, if we don't do it, we will be left out. Well, I am sorry that you wanted to be the most popular girl in school and you forgot what your mother told you about your activities."
Documents released by the committee Tuesday showed that the top executives at mortgage finance companies Fannie Mae and Freddie Mac ignored warnings that they were taking on too many risky loans long before the housing market plunged.
Chairman Henry Waxman, D-Calif, said the committee had obtained nearly 400,000 documents from Fannie Mae and Freddie Mac as part of their investigation.
E-mails and other internal documents released by the committee show that Mudd and Syron disregarded recommendations that they stay away from riskier types of loans.
"We have before us, some of the people who are the perpetrators of the largest meltdown of the country," said Rep. John Mica, R-Fla.
Mica argued that the underwriting standards started to deteriorate during Bill Clinton's presidency. Republicans blame the two mortgage giants for causing the national housing meltdown by thwarting tighter regulations, and also the Clinton administration, for loosening regulations in the first place.
Many Democrats lay the blame on Wall Street banks for loose and flexible lending standards.
But on Tuesday, both sides criticized the executives. Rep. Virginia Foxx, R-N.C., said it was the most bipartisan hearing the House has had.
Mortgage Crisis: Government Bailout
The government took over Fannie Mae and Freddie Mac in September to prevent them from collapsing and worsening the already escalating mortgage crisis. At that time, the two giants owned nearly half of the country's mortgages.
As part of being placed in "government conservatorship," they would get as much money as needed from the Treasury Department to cover losses and continue guaranteeing new mortgages. Their top executives were fired and replaced by Wall Street veterans Herb Allison and David Moffett.
At that time, it was the largest takeover of any financial institution in American history, and was expected to cost taxpayers between $25-$50 billion.
In October, after posting a massive quarterly loss, Freddie Mac asked for a $13.8 billion cash infusion from the government to keep it afloat. Fannie Mae has also warned that it would need a similar loan soon, according to the Associated Press.
"The facts show, gentlemen, that many of you at this table did know the risks and that you were warned not to take them, and that you ignored your internal adviser, your chief risk officer," Rep. Dennis Kucinich, D-Ohio, told the executives in presence.
Rep. Stephen Lynch, D-Mass., pointed out that, in 2006 and 2007, roughly 33 percent of Fannie and Freddie's businesses involved buying or guaranteeing risky mortgages, compared to 14 percent in 2005.
Lawmakers questioned Mudd about an internal Fannie Mae presentation from June 2005 that showed the company at a "strategic crossroads," at which it could either delve into riskier loans or focus on more secure ones.
"We couldn't afford to make the bet that the changes were not going to be permanent," Mudd said in defense of Fannie Mae's efforts.
Syron also added to their defense and his company's plans to compete against Wall Street banks that were pouring money into their loans.
"It's important to remember that Freddie and its sister institution, Fannie Mae, did not create the subprime market," he said.
In his testimony, Syron added that "Freddie Mac entered the non-traditional slice of the market because, as the private lending sector shifted toward those type of loans, Freddie needed to participate in order to carry out its public mission of promoting affordability, liquidity, and stability in housing finance. If it had not done so, it could not have remained competitive or even relevant in the residential mortgage market."
But the committee members didn't buy their defense.
"Their own risk managers raised warning after warning about the dangers of investing heavily in the subprime and alternative mortgage market. But these warnings were ignored" by the two chief executives, said Waxman. "Their irresponsible decisions are now costing the taxpayers billions of dollars."
Fannie and Freddie, which own or guarantee around half the $11.5 trillion in U.S. outstanding home loan debt, traditionally backed the safest 30-year fixed rate mortgages that required a down payment of at least 20 percent. But in recent years, they lowered their standards to match a lending spree fueled by Wall Street banks that backed the now-moribund subprime lending industry.
Fannie and Freddie Under the Microscope
For years, the two companies spurred lobbying efforts in Washington to thwart efforts to impose tighter regulation. Internal Freddie Mac budget records obtained by the Associated Press showed $11.7 million was paid to 52 outside lobbyists and consultants in 2006. Power brokers, such as former House Speaker Newt Gingrich and former Sen. Alfonse D'Amato of New York, were recruited with six-figure contracts.
Questions remain about the future of these congressionally chartered companies and their role in the mortgage market.
Reports have surfaced that the Treasury is weighing a plan to intervene directly in the mortgage industry to force down interest rates and stimulate the housing markets.
But with other troubles on the plate -- such as the U.S. auto industry bailout -- there is concern about the outcome.
Without going into specifics, even President Bush tried to disown the Fannie and Freddie fiasco.
"I think when the history of this period is written, people will realize a lot of the decisions that were made on Wall Street took place over a decade or so, before I arrived ...," he told ABC News' Charles Gibson in a recent interview. "I'm a little upset that we didn't get the reforms to Fannie and Freddie -- on Fannie and Freddie, because I think it would have helped a lot. And when people review the history of this administration, people will say that this administration tried hard to get a regulator. And there will be a lot of analysis of why that didn't happen. I suspect people will find a lot of it didn't happen for pure political reasons."
ABC News' Vija Udenans and the Associated Press contributed to this report.