Why Franklin Raines isn't behind bars belies the issue of politics. I guess it's taxpayers be damned. I say throw away the key if and when justice is ever served.
Dec. 9 (Bloomberg) -- Former Fannie Mae Chief Executive Officer Franklin Raines faulted regulators and lawmakers for encouraging the mortgage-finance company and its competitor Freddie Mac to expand into riskier loan products with limited oversight.
“It is remarkable that during the period that Fannie Mae substantially increased its exposure to credit risk its regulator made no visible effort to enforce any limits,” said Raines, who was ousted in 2004 and accused by federal investigators of accounting manipulation. Raines made his comments in written testimony being delivered today to the House Oversight and Government
Reform Committee in Washington.
Raines, his successor Daniel Mudd, and former Freddie Mac CEOs Richard Syron and Leland Brendsel told the committee that it was a struggle to meet the companies’ dual mandates as profit- making, shareholder-owned corporations that were also required to promote affordable housing, according to the written testimony. Congress pressured the companies to finance more and lower-income borrowers while the regulator did little or nothing to curb their increasing exposure to riskier mortgages, the executives said.
Representatives Henry Waxman and Darrell Issa disputed that account, saying the companies played a primary role in the housing slump and made reckless bets that hurt the market.
“Their irresponsible decisions are now costing taxpayers billions of dollars,” Waxman, the committee chairman, said at the hearing. Waxman said the CEOs ignored the “warnings of risk” and ended up following the market instead of leading it.
Well Capitalized
Raines said the companies’ regulator, the Office of Federal Housing Enterprise Oversight, didn’t seek to restrict the amount of credit risk.
“The regulator limited its intervention to the size of the on-balance sheet mortgage portfolio and the attendant interest rate risk,” Raines said. “Indeed, right up until the time Fannie Mae was placed into conservatorship, the director of Ofheo maintained that the company was well capitalized to withstand the losses it would face.”
Ofheo, which was reorganized with expanded powers this year as the Federal Housing Finance Agency, placed the companies in conservatorship Sept. 6 after regulators discovered that losses at the two largest sources of U.S. mortgage financing were preventing them from fulfilling their mission of supporting the housing market, officials have since said.
Up until the companies were taken over, Mudd said the FHFA “declared us in full compliance with our capital requirements.”
Full Compliance
“At the time the government declared conservatorship over the company, we were still maintaining capital in accord with the relevant regulatory standards, and we were still -- along with Freddie Mac -- the principle source of lending to the mortgage market,” Mudd said in written testimony.
Fannie and Freddie, which own or guarantee $5.2 trillion of the $12 trillion U.S. home loan market, have accounted for 70 percent of all mortgages originated this year, according to the FHFA.
Mudd said the takeover of Fannie was unnecessary, and a “more modest” form of government action would have been enough to keep the business sound.
“While I deeply respect the myriad challenges facing the Treasury Department and the regulator, I did not believe that conservatorship was the best solution for Fannie Mae,” Mudd said in his testimony. Mudd said he argued for “more modest government support” that could have been used to raise private capital, “basically something more like the program many banks are eligible for now,” according to the testimony.
No Man’s Land
Mudd said lawmakers ought to rethink the structure of Fannie and Freddie as shareholder-owned companies with a public mission and “whether the economy would be better served by fully private or fully public” government-sponsored enterprises. With the U.S. housing market in a “freefall,” he said the companies could not “flourish” under the constraints of a business model that required them to support the entire market.
“I would advocate moving the GSEs out of No Man’s Land,” Mudd said. “Events have shown how difficult it is to balance financial, capital, market, housing, shareholder, bondholder, homeowner, private and public interests in a crisis of these proportions.”
Raines and the other executives echoed that sentiment.
“The GSE model is a far from perfect way to achieve the goal of using private capital to achieve the public purpose of homeownership and affordable rental housing,” Raines said. “However, if the public policy goal remains the same, it will be hard to find a model that has more benefits and fewer demerits than the model that worked reasonably well for almost seven decades at Fannie Mae.”
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