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Fannie, Freddie Legal Fees Defended By Regulator

ALAN FRAM   02/15/11 10:17 PM ET   AP

Congress Mortgages

WASHINGTON — The federal regulator overseeing Fannie Mae and Freddie Mac stood by his approval of millions of taxpayer dollars for legal fees defending the housing giants and their executives after accounting scandals, telling angry House committee members on Tuesday that his agency was obligated to do so.

Figures from the House Financial Services Committee's oversight subcommittee show that since the government took over the two corporations in September 2008, taxpayers have provided $162 million defending them in civil lawsuits alleging fraud. That includes $24 million defending former Fannie Mae CEO Franklin Raines and two other Fannie executives, who left the company after accounting irregularities were revealed and were targets of civil suits.

"I share the frustration" of lawmakers, said Edward J. DeMarco, head of the Federal Housing Finance Agency. But, he said, his agency was legally required to cover the payments.

The hearing focused on a tiny portion of the $151 billion that Washington has used to prop up the two mortgage finance companies since taking them over as the housing market collapsed. Members of both parties are talking about scaling back or eliminating the two corporations, which have become symbols of squandered tax dollars at a time of mounting budget deficits.

DeMarco did not rule out taxpayers eventually recovering the lawyers' fees, should ongoing legal action result in a finding that the officials who were sued took actions that violated their duties to their company. But he said that at least for now, Fannie is required to cover the executives' legal fees as long as their actions are considered reasonable.

It is commonplace for companies to cover their executives' legal expenses except in cases of wrongdoing. DeMarco said such coverage was necessary for Fannie to attract talented officials.

Raines and the two others – former chief financial officer Timothy Howard and former controller Leanne Spencer – left Fannie and agreed to pay a $31.4 million settlement, but did not admit to wrongdoing. Fannie Mae paid a record $400 million settlement with federal regulators.

"We've got a problem here," Rep. Randy Neugebauer, R-Texas, chairman of the subcommittee, said of the federal expenditures. "We're broke."

DeMarco and Fannie CEO Michael Williams, who also testified, said had Fannie withheld legal payments from the officials, they likely would have sued – which would have cost taxpayers additional legal expenses.

"You guys don't seem to get it," said Massachusetts Rep. Michael Capuano, the subcommittee's top Democrat, who told DeMarco his agency should have withheld the legal payments and risked a lawsuit. "The difference between this and everything else that's ever happened is this is taxpayers' money."

Ohio Attorney General Mike DeWine, leading the biggest of several lawsuits still pending against Fannie, said the Fannie Mae defendants often bring 40 attorneys and paralegals to court sessions in a case that has dragged on for six years, with some lawyers earning over $600 per hour. Raines also uses numerous lawyers and 25 experts, he said.

"What these defendants are doing is lawyering us to death" using taxpayers' dollars, DeWine said.

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Filed by Ryan McCarthy  |