Fannie, Freddie Ignored Risky Loan Warnings

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.

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