Former GSE chiefs scolded for careless lending

By Patrick Rucker

WASHINGTON (Reuters) - Four men who led failed mortgage finance giants Fannie Mae and (FNM.P) Freddie Mac (FRE.P) were called before a U.S. House of Representatives panel on Tuesday and chided for making risky loans that fueled a housing crisis and helped push the economy into recession.

"The CEOs of Fannie and Freddie made reckless bets that led to the downfall of their companies. Their actions could cost taxpayers hundreds of billions of dollars," House Oversight and Government Reform Committee Chairman Rep. Henry Waxman said.

The committee reviewed over 400,000 documents, many that passed through the hands of Daniel Mudd, the former chief executive officer of Fannie Mae, and Richard Syron, the former chief of Freddie Mac, who were both dismissed when the government seized the companies in early September.

Rep. Waxman, a Californina Democrat, faulted the executives for diving into a flawed market but said "it is a myth to say that (Fannie Mae and Freddie Mac) were originators of the subrime crisis."

Record foreclosures are now wreaking havoc on the housing market and broader economy but the woes started among flawed, easy-to-get subprime mortgages nurtured by Wall Street.

GOVERNMENT TAKEOVER

The Treasury Department effectively took control of Fannie Mae and Freddie Mac as they faced collapse after recording billions of dollars of losses and as investor confidence evaporated. In the previous four or five years, the companies expanded their holdings of risky loans that eventually poisoned the companies' books.

While Fannie Mae and Freddie Mac were among the most conservative in their underwriting standards, Waxman pointed to documents that showed company executives eventually chose to follow Wall Street and extend high-risk loans.

"The real revenue opportunity was in buying subprime and other alternative mortgages. To pursue this course, the company would have to 'accept higher risk and higher volatility of earnings'," Waxman said, quoting a 2005 internal memo from Mudd. "The lure of additional profits proved too great."

All of the former executives said the companies were, in part, victims of government charters that banned Fannie Mae and Freddie Mac from making investments in anything but mortgages.

"Fannie Mae did not cause the current crisis," said Franklin Raines, who left Fannie Mae under the cloud of an accounting scandal in 2004.

Fannie Mae and Freddie Mac were not leaders but followed other market players into a dangerously risky market, he said.

"By the time the (government-sponsored enterprise) began its most significant investments in riskier loans in 2005, the roots of the present crisis had long taken hold," he told lawmakers.

Leland Brendsel, the fourth witness, resigned as chief of Freddie Mac in 2003 after 21 years with the company. He left after regulators accused the company of using flawed accounting to smooth quarterly earnings.

While he lamented the failure of Freddie Mac, Brendsel said the company's work to increase affordable lending was laudable.