WASHINGTON (Reuters) - The former chief of Fannie Mae, the top U.S. mortgage finance company whose purchase of risky home loans led to a massive government bailout, on Friday apologized for the company’s failings and shouldered the blame.
But even as Daniel Mudd, who was ousted as chief executive when government regulators seized Fannie Mae in September 2008, accepted responsibility, he said the company’s business model created an unmanageable situation.
“I was the CEO of the company and I accept responsibility for everything that happened on my watch,” Mudd said at a hearing before a congressional investigative panel assigned to probe the origins of the 2007-2009 financial crisis.
A former government regulator who oversaw Fannie and its sister firm Freddie Mac gave a more blistering assessment.
Fannie Mae, along with Freddie Mac, was placed under the control of regulators when its business was in disarray and the U.S. housing market was in free-fall.
The two companies have received more than $100 billion in government support, and have said more aid will be needed.
The spectacular failures of the two firms -- both government-sponsored enterprises (GSEs) created to expand mortgage finance but which operated as private, profit-making companies -- marked a turning point in their controversial history and in the U.S. housing market.
Congress and the Obama administration, consumed for the past two years with shoring up Wall Street and the banking system, have barely begun to figure out how to fix the GSEs, which own or guarantee half of all U.S. residential mortgages.
“The Fannie and Freddie model of publicly traded and privately held government-chartered companies is inherently flawed,” said Armando Falcon, former regulator of the two companies in testimony following Mudd’s at the hearing held by Congress’ Financial Crisis Inquiry Commission.
Falcon, former director of the defunct U.S. Office of Federal Housing Enterprise Oversight, said the present set-up gives the GSEs “market and political power that ... breeds arrogance, greed, excessive risk taking and abuse.
“If Fannie and Freddie are allowed to continue in any variation of their current form, another commission, at some future date, will again be asking the same questions of what went wrong,” Falcon told the commission.
COMMISSION PROBES SECURITIZATION BREAKDOWN
Organized by Congress, the commission has held three days of public hearings, focusing on the breakdown of the home mortgage securitization market and its role in triggering a crisis of confidence that paralyzed global banking in 2008 and tipped the U.S. economy into a deep and long recession.
At the outset of Friday’s hearing, Mudd apologized and accepted blame, in a more frankly remorseful approach than was seen in previous hearings by former executives from bailed-out banking titan Citigroup, who were mostly evasive and defensive.
Mudd, however, said the root cause of the GSEs’ problems was their business model. In a historic home price slump, the firms could not maintain their mandated balance between “financial goals” of growth and profitability, and “mission goals” of providing liquidity and housing finance for low-income Americans.
“I sought to balance the fine points of mission and business insofar as I could understand them, with the support of regulators and policy makers. That was no longer possible by September 6, 2008, and I am sorry for that,” he said.
“There have been suggestions that Fannie Mae subordinated its mission to the pursuit of higher profits, but I beg to differ,” he said, adding that homeownership rates were too high ahead of the financial crisis and the government must now decide what role it wants to play in financing U.S. homes.
The Senate is debating legislation aimed at tightening regulation of banks and capital markets. The House of Representatives has already approved a bill along those lines.
FINANCIAL REFORMS LACK GSE PLAN
Analysts expect Congress to send a final bill to President Barack Obama this year. But it will lack a plan for reshaping the GSEs -- a gaping hole lawmakers must come to grips with.
“There will be no change to the housing finance system in 2010,” said Jaret Seiberg, policy analyst at investment firm Concept Capital. “Reform is likely to take years. We could see this slipping past the 2012 presidential election.”
House Financial Services Committee Chairman Barney Frank held a hearing last month on the issue and will hold another one on Wednesday. Many more hearings and debate lie ahead.
U.S. Treasury Secretary Timothy Geithner said last month that mortgage finance needs a revamp. The Obama administration is expected to issue for comment on Thursday a series of basic questions about the future of housing finance.
Mudd told the commission that fully privatizing the GSEs is unrealistic and government will have to play some role, considering that roughly 90 percent of home loans today have some sort of governmental involvement.
“The notion that you would go back to a fully private structure cannot be logistically accomplished in our lifetimes,” he said, adding that the GSEs’ best future role would likely be to help first-time homebuyers with traditional 30-year fixed-rate mortgages and 20 percent downpayments.
Editing by Leslie Adler
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