The Securities and Exchange Commission sued six former Fannie Mae and Freddie Mac executives on Friday for misleading the public about the mortgage giants’ exposure to risky subprime mortgages as the housing bubble deflated.
Former Fannie Mae chief executive Daniel Mudd and former Freddie Mac CEO Richard Syron are the highest-ranking officials yet to be charged for their involvement in the housing meltdown that triggered the biggest financial collapse since the Great Depression. Along with four other former executives for the companies, they are accused of fraud, under-representing the amount of exposure the finance companies had to dodgy mortgages.
Also charged with fraud: former Fannie Mae chief risk officer Enrico Dallavecchia, former Fannie Mae executive vice president Thomas Lund, and former Freddie Mac executive vice presidents Patricia Cook and Donald Bisenius.
“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, in a statement.
The SEC alleges that Freddie Mac systematically understated its exposure to subprime mortgages. Freddie Mac stated in its public filings that its exposure of subprime mortgages was only one to two percent of the amount actually held, according to the SEC.
In early 2007, with the housing market beginning its tumble, Freddie Mac claimed it held just $2 billion in subprime loans. The company was in fact exposed to $141 billion in subprime loans at the end of 2006, a number comprising 10 percent of its entire single-family portfolio, according to the SEC.
The SEC claims that by the summer of 2008 Freddie’s exposure to subprime loans had grown to $244 billion, comprising 14 percent of its single-family portfolio. That summer, Freddie allegedly claimed only $6 billion of its loans to be subprime.
Fannie Mae similarly excluded 90 percent — or $43.3 billion — of its subprime single-family mortgage portfolio from a public filing by labeling those mortgages differently in February 2007, according to the SEC.
In another instance, Fannie Mae failed to report 39 percent of its low-documentation loans in a May 2007 filing, according to the SEC. While the company publicly reported about 11 percent of its single-family mortgages were low-documentation loans, they in fact comprised 17.9 percent of its portfolio, the SEC alleges.
This is what happens when you privatize public institutions and provide government insurance for their losses. We see fraud all the time in privatized institutions that should be run by the government. The savings never materialize but fraud sure does.