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Fannie, Freddie saga heats up

By Judy Martel · Bankrate.com
Friday, December 16, 2011
Posted: 3 pm ET

Troubles continue to plague Fannie Mae and Freddie Mac, the giant mortgage companies that were taken over by the government in 2008 and bailed out by taxpayers.

The Securities and Exchange Commission, or SEC, sued three former executives at each of the two companies, including the former CEOs, charging them with misrepresenting the amount of subprime mortgages they held as the housing market began to disintegrate. Subprime mortgages are offered to people with low credit who present a higher risk of default.

Daniel Mudd, former CEO of Fannie Mae and current CEO of Fortress Investment Group, said in a statement that the government reviewed and approved of the company's financial disclosures and shouldn't have sued. The SEC counters that although Fannie Mae had approximately $43 billion of risky, subprime mortgages on its books in 2007, the company stated it had $4.3 billion.

Freddie Mac's exposure was even worse: Though it claimed in 2006 to have roughly $2 billion to $6 billion of subprime on its books, it actually owned $141 billion and increased that to $244 billion by 2008, according to the SEC. Former Freddie Mac CEO Richard Syron is also named in the suit.

Fannie Mae and Freddie Mac guarantee about half of all mortgages. In September, the SEC said it was close to settling with the two companies after conducting a three-year investigation. That settlement would have amounted to a slap on the hand, with neither company admitting fraud or paying a fine.

Two weeks before that announcement, the agency that oversees Fannie and Freddie, the Federal Housing Finance Agency, sued 17 large banks on behalf of the two mortgage giants, charging them with misrepresenting the quality of loans sold to Fannie and Freddie.

Are you still with me? Did anyone seem to realize the risk of these subprime loans and the extent to which they were sold? It sounds more like it was a matter of taking the money while it was plentiful and then playing hot potato to see who ended up holding the risky mortgages when the market came crashing down. Unfortunately, it's been more widespread than anyone anticipated, and the taxpayers are left picking up most of the tab.

What do you think of the latest twist in the Fannie/Freddie saga?

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