Watchdog: Fannie, Freddie Must Spend Less On Legal Fees For Former Executives

WASHINGTON -- The U.S. government regulator for Fannie Mae and Freddie Mac must do a better job limiting legal expenses paid by the two mortgage giants to their former executives facing lawsuits, a new watchdog report says.

A report issued Wednesday by the inspector general for the Federal Housing Finance Agency says Fannie and Freddie together have paid more than $109 million in legal expenses for former executives since 2004, with Fannie covering more than $99 million for just three top officials.

Taxpayers are footing the bill: The bailouts of the two companies have so far cost about $150 billion and that figure continues to grow.

The report says the agency should develop standard legal billing practices for Fannie and Freddie, expand its oversight and take other steps.

Fannie and Freddie buy mortgage loans from primary lenders, pool them, and sell them with a guarantee that investors will be paid even if borrowers default. The agencies have helped people buy homes at affordable interest rates.

But the two nearly collapsed in 2008, after the subprime mortgage market collapsed and defaults and foreclosures piled up. The government seized them in September 2008.

The report issued by the inspector general for the FHFA, Steve Linick, came a day after the agency submitted a plan to Congress that would shrink the mortgage giants' role in the housing market.

The proposal for a leaner Fannie and Freddie would mean that fewer mortgages are backed by the government. That could make buying a home more expensive because it would lead to higher interest rates. Under the plan, Fannie and Freddie could also increase its prices to guarantee loans and establish agreements with private investors to take on added credit risk.

The FHFA said in a memo that it agrees with the inspector general's recommendations to continue its efforts to control costs and that it "will work expeditiously." The agency's office of general counsel will heighten its scrutiny of legal costs, the memo said.

Fannie and Freddie and their former senior executives face several class-action lawsuits filed by shareholders and others, alleging securities fraud and other violations and seeking billions of dollars in damages.

In December, the Securities and Exchange Commission brought civil fraud charges against six former executives at the two companies, including former Fannie CEO Daniel Mudd and former Freddie CEO Richard Syron. The SEC accused the executives of understating the level of high-risk subprime mortgages that Fannie and Freddie held before the housing bubble burst in 2007.

Mudd said through his attorney that the government reviewed and approved all of Fannie's financial disclosures. Syron's lawyers said the term "subprime had no uniform definition in the market" at that time and that "there was no shortage of meaningful disclosures."

The inspector general's report says Fannie and Freddie has paid legal expenses for Mudd, Syron and the other four former executives sued by the SEC, but it did not provide the amounts. The report did say that Freddie has paid about $10.2 million in legal expenses for an unspecified number of officers and directors since September 2008.

The total legal expenses to be paid by the two companies ultimately could far exceed the $109.6 million specified in the report.

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Comments

[JDINTX]

02:50 PM on 02/23/2012

".....$10 million in legal fees since '08, but $109 MILLION in the report" ? Other sites are reporting the $100 million number. Which is it? Is this article distorting the facts?
When these GSE's went into receivership, the FHFA had the right to abrogate these outrageous employment contracts that carried these ridiculous provisions.
Another story for the day, tomorrow the media moves on; no one fired, no one transferred and worst of all, NOTHING will be done to end this practice.
Someone should be held accountable.....anyone believe anyone will ?

[Luanne Taylor]

10:24 AM on 02/22/2012

99 Million for 3 people! THREE, 3, 3 individuals....cut them off NOW, and shame on the attorneys who have billed that much....

[Luanne Taylor]

10:21 AM on 02/22/2012

legal fees, paid for by US, makes me sick. Fines do NOT work with these people, so how about this. Hire some of those unemployed lawyers I keep reading about. If the former exec can not afford his own lawyer, than we assign one, it's gotta cost less than 109 Million! ...it IS the American way, guess you need to arrest them first. which is also a good plan. How many people are we talking about here?

[Not2Tired2Stand]

10:08 AM on 02/22/2012

Tax payer money used to bring the law suit. Tax payer money used to defend the law suit. And if any settlement were required, guess whose money it'd be?

This is a self-licking ice cream cone that only the government could conjure up.

[pjohnh]

09:36 AM on 02/22/2012

"Fannie and Freddie buy mortgage loans from primary lenders, pool them, and sell them with a guarantee that investors will be paid even if borrowers default."

When people read something like that, it should really start to turn the light on as to how easily this whole system can just be destroyed....and don't worry, the insurance companies that make this possible, don't ever have to have enough capital to cover all their policies (because what is insurance really?) because it is all predicated on the huge amount of revenue US taxpayers can cover at a moments' notice.