Former Fannie Mae & Freddie Mac executives charged with fraud
The Securities and Exchange Commission has filed fraud charges against six former top executives at mortgage giants Fannie Mae and Freddie Mac.
The former executives are accused of misleading investors about the true extent of the high-risk subprime mortgages held by both companies in the years leading up to the housing bust.
“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. “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.”
The executives being sued by the SEC are:
- Daniel H. Mudd, who served as the chief executive officer of Fannie Mae from June 2005 until September 2008;
- Enrico Dallavecchia, who served as the chief risk officer of Fannie Mae from June 2006 until August 2008;
- Thomas A. Lund, who served as the executive vice president of Fannie Mae’s Single Family Credit Guarantee business from July 2005 until June 2009;
- Richard F. Syron, who served as Freddie Mac’s chief executive officer and chairman of the board of director from December 2003 until September 2008;
- Patricia L. Cook, who served as the executive vice president of investments and capital markets and chief business officer at Freddie Mac from August 2004 until September 2008;
- and Daniel J. Bisenius, who served as Freddie Mac’s senior vice president of credit policy and portfolio management and senior vice president of Single Family Credit Guarantee business from November 2003 until May 2009.
The SEC is seeking permanent injunctions, officer and director bars, and financial penalties against the defendants. In addition, the SEC is asking the court to force the executives to pay back their ill-gotten compensations with interests.
The SEC complaints accused the six executives of knowingly and repeatedly making false statements that masked the true extent of the companies’ exposures to subprime mortgages. Subprime loans are considered riskier because of their higher payment delinquency and default rates compared to traditional loans.
According to the SEC, Fannie Mae reported in December 2006 that only $4.8 billion or 0.2% of its Single Family mortgage portfolio consisted of subprime loans or loans “made to borrowers with weaker credit histories.” But in reality, Fannie Mae’s exposure to the subprime loans was 10 times higher at the time.
Taking into account the Expanded Approval (EA) and Alt-A loans, which were loans made to “credit impaired borrowers” and loans with fewer documentation requirements, the company’s actual exposure to subprime mortgages amounted to $43 billion.
Despite this, Fannie Mae repeated similar misleading disclosures in March and June of 2007. Fannie Mae’s former CEO even stated that “Fannie Mae has ‘about zero percent’ exposure to subprime loans” in a radio interview only weeks before the company was placed in a government conservatorship.
“[Daniel] Mudd, [Thomas] Lund and [Enrico] Dallavecchia each knew, based on reports and internal data they received on a regular basis, that the company’s reported to subprime and Alt-A loans was inaccurate,” according to the SEC complaint. “The result of these disclosures was to mislead investors into seriously underestimating Fannie Mae’s exposure to subprime loans.”
Freddie Mac also grossly underreported its actual exposure to subprime loans. According to the SEC, Freddie Mac disclosed between $2 billion to $6 billion in subprime loan holdings – making up just 0.1% to 0.2% of its Single Family Guarantee business – in 2007 and 2008 respectively. But Freddie Mac’s internal data showed the company’s exposure to “subprime,” “otherwise subprime,” and “subprime-like” loans were actually between $141 billion and $244 billion, or 10% to 14% of the Single Family Guarantee portfolio.
Freddie Mac and its top executives – Richard Syron, Patricia Cook and Donald Bisenius – “misled investors into believing that the company had far less exposure to these riskier mortgages than in fact existed,” according to the complaint.
The SEC complaints also alleged that Fannie Mae and Freddie Mac executives greatly profited from expanding both companies’ holdings of riskier subprime loans.
At Fannie Mae, Mudd’s taxable compensation jumped from $6.16 million in 2006 to $10.65 million in 2007; Lund’s taxable compensation doubled from $833,658 in 2006 to $1.9 million in 2007; and Dallavecchia’s taxable compensation more than doubled from $617,866 in 2006 to $2.68 million in 2007 as a result of the company’s expansion in the subprime loans market.
At Freddie Mac, Syron’s compensation grew from $14.7 million in 2006 to $18.3 million in 2007 and Cook received more than $5 million in bonuses in 2006 and another $1.6 million in bonuses in 2007 largely due to the company’s expanded acquisition of riskier loans during that period.
Fannie Mae and Freddie Mac have signed agreements with the SEC to cooperate in the commission’s lawsuit against the companies’ former executives.
Background on Fannie Mae & Freddie Mac
Fannie Mae (or Federal National Mortgage Association) and Freddie Mac (or Federal Home Loan Mortgage Corporation) are shareholder-owned government-sponsored enterprises created by Congress to encourage homeownership by providing financing to banks and mortgage lenders.
Banks and lenders would approve and process the mortgages after reviewing the loan application, assessing the property’s worth, and determining whether or not the homeowner has the ability to pay back the loan. Fannie Mae and Freddie Mac would purchase the mortgage securities – or home loans made by the banks and lenders – that meet the their requirements, thereby freeing up money for the banks and lenders to provide more loans to homebuyers.
Between 2006 and 2008, Fannie Mae and Freddie Mac began to purchase more subprime mortgages from the banks and lenders. In addition, both companies loosened their requirements for documentations on home loans, including verification of the homeowner’s actual income and assets, at the height of the housing boom.
As more and more subprime borrowers struggled to meet their monthly payments – and many defaulting on their mortgages altogether – Fannie Mae and Freddie Mac suffered significant losses. In August 2008, Fannie Mae reported $2.3 billion in losses, of which 70% were attributed to subprime loans. A month later, the Federal Housing Financing Agency (FHFA) placed both Fannie Mae and Freddie Mac under its conservatorship.
- SEC.gov: United States Securities and Exchange Commission vs. Daniel H. Mudd, Enrico Dallavecchia, and Thomas A. Lund (Fannie Mae) civil complaint filed on Dec. 16, 2011 (PDF)
- SEC.gov: United States Securities and Exchange Commission vs. Richard F. Syron, Patricia L. Cook, and Donald J. Bisenius (Freddie Mac) civil complaint filed on Dec. 16, 2011 (PDF)
- SEC.gov: Non-Prosecution Agreement with Fannie Mae (PDF)
- SEC.gov: Non-Prosecution Agreement with Freddie Mac (PDF)
- SEC.gov: SEC charges former Fannie Mae and Freddie Mac executives with securities fraud
- Freddie Mac’s website
- Fannie Mae’s website