Mudd Covers Fannie Mae Record

Today Barney Frank's House Financial Services Committee will hear ideas from across the political spectrum about what the next-generation Fannie Mae and Freddie Mac should – and should not -- be able to do.

Congress had better pay attention to ex-Fannie CEO Daniel Mudd, who with colleague Robert Levin went before the Financial Crisis Inquiry Commission late last week to give his account of why Fannie Mae ended up as good as wiped out, and in the hands of the U.S. government.

Fannie's losses are expected to cost U.S. taxpayers more than $300 billion.

"In hindsight, less credit exposure to new homeowners, non-traditional products and regions of the country in economic downturn might have reduced losses," Mudd told the bipartisan panel. In other words, mandates from Congress and the U.S. Department of Housing and Urban Development to make credit available to low- and moderate-income borrowers ended up costing Fannie Mae dearly. That's the same conclusion Alan Greenspan came to in testimony to the commission earlier last week.But a preview of today's House hearing makes clear that some advocates still want to see the next-gen Fannie and Freddie obligated to make sure lower-income Americans can obtain home mortgages fairly. In fact, the head of the Massachusetts state housing-finance agency, MassHousing, plans to stand up and demand – on behalf of state housing agencies around the country -- even stronger requirements. MassHousing's Thomas Gleeson would like to see Fannie and Freddie work "to finance affordable and sustainable homes and to reach underserved people, markets, and needs, including low- and moderate-income people, low-income communities and rural areas, and populations with special needs."

Before you write off the idea of getting government into the business of helping finance mortgages for lower-income customers, remember that this is not an inherently risky business -- if done right. Fannie and Freddie went into a death spiral because they were sidelined by Wall Street bankers who set out to steal their customers with high-risk loans that Fannie and Freddie's fairly strict lending rules wouldn't allow.

Once Wall Street got out of hand by financing teaser-rate, low-down-payment, no-doc ARMs and the like for anyone who would ask, low-income borrowers flocked to those loans in droves. Forget Fannie and Freddie – their mortgages took too long to get.

For a long time, Fannie and Freddie required its borrowers to be counseled about what they were getting into and how not to get ripped-off. But why bother when you could close a subprime loan with a lower teaser rate in three days?

With their customer base sucked dry, Fannie and Freddie ended up meeting their obligations to serve low-income borrowers by buying up Wall Street securities containing subprime mortgages. And that's where they've taken a big chunk of their losses.

Both companies eventually did buy subprime loans directly, since it was the only way to stay in the mortgage game. But even there, as Mudd noted, they were a lot more careful than their Wall Street competition and saw much smaller losses (though much bigger than on Fannie's prime portfolio). As Mudd summed up the problem: Fannie and Freddie's "business model [was] chained to a market that was in freefall."

So what's the answer? Even Mudd couldn't come up with one.

Put government in charge, and taxpayers are on the hook. Keep lending entirely private, and consumers shoulder the risk. The answer is somewhere in-between, and all we know it won't be named Fannie or Freddie.

See more coverage of Fannie Mae.

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