Real Estate Market

SEC sues former Fannie, Freddie execs for mortgage securities fraud dating back five years

(12/21/2011) - While taxpayers were pumping $150 billion into Fannie Mae and Freddie Mac to rescue them from collapse, Fannie and Freddie executives allegedly lied to investors, the public and regulators about their true exposure to risky, toxic-home loan mortgage securities.

The lies allegedly date back to 2006, but not until Dec. 16, 2011, in twin lawsuits, did the U.S. Securities and Exchange Commission get around to suing former executives from the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) for allegedly masterminding a multi-billion masquerade that has the markings of organized crime.

The former executives' lawyers say their clients are innocent and that the SEC cases are unfounded, but Fannie Mae and Freddie Mac each entered into an agreement with the SEC to "accept responsibility for its conduct and not dispute, contest, or contradict the contents of an agreed-upon statement of facts without admitting nor denying liability."

The agreement includes promises the housing finance giants will cooperate with the commission's litigation against the former executives.

The complaint against former Fannie Mae executives alleges that, as of the second quarter of 2008, Fannie Mae had disclosed only $8 billion in subprime mortgage securities holdings, when it actually held $110 billion worth. Also, as of March 31, 2007 Fannie reported its exposure in the Alt-A market at only 11 percent of its holdings when they actually amounted to 18 percent, according to the SEC's suit.

In the complaint against former Freddie Mac executives, the SEC alleges the executives reported only $6 billion in exposure to subprime market investments, but the amount was actually a whopping $250 billion.

The SEC says the executives fudged the disclosures by using narrow definitions of subprime and Alt-A loans, among other alleged deceptions.

The suit alleges the two agencies were blowing smoke as far back as 2006, but doesn't explain how the SEC was duped or why it has taken five years to uncover the alleged crimes and go after the suspects.

Investors have been screaming about questionable Fannie and Freddie behavior since the housing market crashed, taking the economy down with it.

SEC's Fannie Mae charges were leveled against former Chief Executive Officer Daniel H. Mudd, former Chief Risk Officer Enrico Dallavecchia, and former Executive Vice President of Fannie Mae's Single Family Mortgage business, Thomas A. Lund SEC's Freddie Mac charges were leveled against former Chairman of the Board and CEO Richard F. Syron, former Executive Vice President and Chief Business Officer Patricia L. Cook, and former Executive Vice President for the Single Family Guarantee business Donald J. Bisenius.

The regulatory agency is seeking financial penalties, repayment of any related financial gains - with interest - and a permanent injunction against those sued to prevent them from ever holding similar government jobs.

"Fannie Mae and Freddie Mac executives told the world that their subprime exposure was substantially smaller than it really was," said Robert Khuzami, Director of the SEC's Enforcement Division.

"These material misstatements occurred during a time of acute investor interest in financial institutions' exposure to subprime loans, and misled the market about the amount of risk on the company's books. All individuals, regardless of their rank or position, will be held accountable for perpetuating half-truths or misrepresentations about matters materially important to the interest of our country's investors," Khuzami said.

A past study may have given Fannie Mae and Freddie Mac somewhat of a bye on contributing to the mortgage meltdown, but only because the study's producer, like the SEC, wasn't privy to the allegedly hidden disclosers named in the suit.

Research from the Center for Responsible Lending (CRL) earlier this year, "Wall Street, Not Fannie Mae & Freddie Mac, Created & Led the Toxic Mortgage Market," said toxic subprime loans started the foreclosure crisis and the disaster spread to other mortgages approved without properly qualifying borrowers.

However, "GSEs (Fannie and Freddie) did purchase subprime mortgage-backed securities as investments, but not in a volume that matched Wall Street purchases," the report said.

Critics say the SEC action is absurdly akin to the pot calling the kettle black because few entities can be fully absolved of culpability when it comes to what has become known as the Great Recession.

Fannie Mae and Freddie Mac provided billions for home mortgages by buying toxic loans made by banks, pooled them into just as toxic securities and sold them to investors. When the mortgages went to hell, so did the securities, but slothful, ill-equipped regulators were part of the problem.

The SEC's job is to be "concerned primarily with promoting the disclosure of important market-related information, maintaining fair dealing, and protecting against fraud....The mission of the U.S. Securities and Exchange Commission is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation."

So, who regulates the regulators?

No one, it appears, unless you consider the financial rating agencies' feeble efforts at financial oversight.

According to the Financial Crisis Inquiry Commission (FCIS), in its "Financial Crisis Inquiry Report," the mother-of-all Great Recession reports, there's plenty of blame to go around, yet few have paid the price -- other than taxpaying working stiffs and the jobless.

The FCIS report is clear, along with the SEC and other federal regulators, legislators, government and private mortgage finance and investment firms, rating agencies, the real estate sales market, speculators, and even home buyers contributed to nuking the nation's economy.

The most damning news from the report is that the economic calamity was avoidable, but too many systems, supposedly in place to protect the economy and taxpayers, were piloted by people asleep at the wheel or greedily capitalizing on those who were dozing.

"The captains of finance and the public stewards of our financial system ignored warnings and failed to question, understand, and manage evolving risks within a system essential to the well-being of the American public. Theirs was a big miss, not a stumble," the grim report laments, not unlike the scathing "Inside Job" documentary.

Certainly, the SEC and other regulatory agencies should go after convictions of any criminal entity that unlawfully contributed to the lingering economic disaster, but not with yet another festering round of suits financed by taxpayers.

It's what occupiers are saying with bullhorns; what voters are saying at the ballot box and what consumers are saying with their wallets.

The Dodd-Frank Wall Street Reform Act made it the law of the land, from sea to shining sea.

No matter what color collar they wear, criminals are supposed to do hard time for the crimes they commit and this special breed of miscreant must also make financial reparations to help make whole an economy they helped destroy.

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