More Perspective and Discussion on the Mortgage Crisis Commission

by devteam April 13th, 2010 | Share

Hearings on Subprime Lending and Securitization and Government-Sponsored Enterprises,” were conducted last week by the Financial Crisis Inquiry Commission (FCIC.)  The ten member bi-partisan Commission was established under the Fraud Enforcement and Recovery Act of 2009 to “examine the causes, domestic and global, of the current financial and economic crisis in the United States.”

During three days of testimony 17 persons including 8 from Citigroup, Citi Mortgage, and Citi Markets and two former Chairmen of Citigroup spoke, however, it was the testimony of former Federal Reserve Chairman Alan Greenspan and the four persons heavily involved in operating or regulating Fannie Mae and Freddie Mac which got the lion's share of atttention.

According to a report in the Los Angeles Times, Greenspan strongly defended his actions and warned that regulators alone couldn't stop financial crises. The best prevention, he said, would come from increasing requirements on banks and other financial institutions to have more money and collateral to carry them through rough times.

The Times said that, while Greenspan admitted mistakes during his tenure as Fed chairman, he denied that his free-market ideology kept him and consequently the Fed from regulating some of the largest banks and writing rules to protect consumers from unscrupulous lenders.  Greenspan also said that had the Fed acted to rein in subprime lending before the housing bubble burst there would have been a backlash by members of Congress eager to see an increase in U.S. homeownership.

The Huffington Post, however, headlined their coverage “Greenspan FINALLY Acknowledges Existence of Fraud.  The Internet publication reported that Greenspan responded to a question from a commissioner as to whether subprime lenders should now be supervised by the Federal Reserve, saying, “Well, first of all, remember you have to distinguish between supervision and enforcement. A lot of the problems which we had in the independent issuers of subprime and other such mortgages, the basic problem there is that, if you don't have enforcement, and a lot of that stuff was just plain fraud, you're not coming to grips with the issue.”

Friday's panelists included two former Federal directors of the Office of Federal Housing Enterprise Oversight (OFHEO), the agency that regulated Freddie Mac and Fannie Mae before they were seized by the government.  Ryan Holeywell, writing for, reported that both Armando Falcon and James Lockhart think that Fannie Mae and Freddie Mac, which have already received $125 billion in bailouts will likely need even more aid.

Holeywell said, that in addition to noting the huge cost to taxpayers of the collapse, FCIC panelists also questioned the appropriateness of Fannie Mae and Freddie Mac lobbying Congress against regulation that would have ultimately protected the taxpayer.  He quoted one Commissioner as saying “It strikes me as astonishing.”

Falcon and Lockhart both said that they had done what they could to reign in the GSE's as the securitized mortgage industry appeared to be collapsing, but they were hamstrung by the Department of Housing and Urban Development from doing more

Lorraine Woellert, writing for Bloomberg said that both men blamed political support for Fannie and Freddie for thwarting efforts to reform the two companies.  Falcon, who was OFHEO Director from 1999 to 2005, said the public-private structure of the GSEs bred “greed, excessive risk taking and abuse.  The companies were not unwitting victims of an economic down cycle or flawed products and services.  Their failure was deeply rooted in a culture of arrogance.”

In an April 9 article, The New York Times wrote that Daniel H. Mudd, who was serving as CEO of Fannie Mae at the time the government took control of both it and Freddie Mac in September 2008, testified that too many conflicting goals make it all but impossible for the mortgage companies to return to their earlier form

He too said that the public-private structure of the companies required them “to maintain a fine balance between financial goals and what we called mission goals.”  That led to conflicts between pursuing profitability and public policy, between paying competitive salaries and not wasting taxpayer money, and between choosing loosened financial constraints or tough regulation.  “One one hand,” he said, “without revenue and profits and growth, the company could not attract global capital to the U.S. housing market, and on the other hand, without meeting the mission goals for affordable housing and liquidity, the GSEs could not meet the requirements of their Congressional charter.”

The article reported that several members of the commission thought a big part of the problem was not conflict in the structure of the mortgage companies but in the incentives of executives; that the decision to plunge deeply into the market for subprime loans was driven by the desire to increase profits as a way to increase earnings-related compensation.  

Mudd responded that the company was competing for employees not with nonprofit groups but with well-paying for-profit companies and with Wall Street.

In a second article, the New York Times quoted Robert J. Levin, Fannie's former chief business officer as blaming some of corporations other problems on competition with the for-profit sector as well.  Levin said that Fannie risked losing its “relevance” in the market if it didn't ply in riskier mortgages.  With Fannie's competitors issuing unregulated securities, and mortgage-backed securities, the market share of bonds from Fannie and Freddie diminished rapidly and, Levin said, Fannie could not ignore grabbing a piece of the growing market, even if it involved riskier subprime and Alt-A loans.

Levin said that competition posed another problem for Fannie because it sharply lessened the GSE's ability to influence market activity which would have marginalized Fannie's goal of maximizing profits for shareholders and promoting home ownership.  Moreover, by not participating in the riskier part of the mortgage market, Fannie would have had more difficulty fulfilling another mandate, providing government assistance to low-income buyers.

The Times said the two mortgage-company executives did show some contrition, as has been the usual procedure for executives or regulators who have faced tough questioning by the commission.

I was the C.E.O. of the company and I accept responsibility for everything that happened on my watch,” Mr. Mudd said.

Reuters also focused on Mudd's testimony about the future role of the GSEs, quoting the former executive's opinion “that with where we are at 90 something percent of the loans in the market today being run through the government in one form or another, the notion that you would go back to a fully private structure cannot be logistically accomplished in our lifetimes.”  He suggested that the government sponsored enterprises should be structured to promote first-time homebuyers with traditional 30-year fixed rate mortgages and 20 percent down payment, “getting folks on the (homeownership) ladder in the first place.”

The Wall Street Journal referred to “clashing views” about the background of the failure of Fannie Mae saying that one view “blamed the 'impossible' balancing act of the company's competing missions, while a former regulator blamed management failures.

The article quoted Mudd as saying that he “sought to balance the fine points of mission and business insofar as I could understand them,” but by the time the government seized Fannie “that was no longer possible…and I am sorry for that.”

Former OFHEO head Falcon, however, in referring to what he called “a culture of arrogance and greed,” asked how a business “with the most generous government subsidies possible” could be run “into the ground.”

The  Wall Street Journal said that the hearing “brought forward a paradox:  For years Fannie fended off efforts to restrict its growth by arguing that it had the best risk-management tools and brightest minds. But on Friday, executives said that their business model doomed their ability to manage a national and sustained housing meltdown.”

Eamon Javers, writing for Politico, said that “It turns out that even the former CEO of Fannie Mae thought that his company had an impossible task.”  Mudd, the article said, told the commission that the demands on the firms to improve housing access while maximizing profits were sometimes in unworkable conflict with each other.

“When prices crashed far beyond the realm of historical experience, it became 'The Pit and the Pendulum,' a choice between horrible alternatives. I wish I could have maintained the delicate balance of the roles assigned to Fannie Mae, and I am sorry that I could not,” Mudd said in his prepared testimony.  

Politico pointed to the issue of the two companies as political lightning rods, “with Republicans arguing that efforts by Democrats to push the two entities to extend home lending to more and more people – even to those who may have been unable to pay their mortgages – helped fuel the subprime mortgage boom that ultimately became the trigger for the broader economic collapse in 2008.”

MarketWatch said that the two former Fannie Mae officials blamed the failure of the GSEs on “an unprecedented decline in home prices that was catastrophic and unforeseeable.”  Ronald D. Orol quotes Levin; “In hindsight, if we and the industry as a whole had been able to appreciate the nature and extent of the crisis, it is clear we would have conducted our business differently during this period, but we, like everyone else were surprised by the unprecedented extend of the economic crisis.”


HERE is the Preliminary FCIC Staff Report


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About the Author


Steven A Feinberg (@CPAsteve) of Appletree Business Services LLC, is a PASBA member accountant located in Londonderry, New Hampshire.

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