Fannie Mae Ex-CEO: We had to ‘Take Up Slack’ in Crisis

Former Fannie Mae CEO Daniel MuddA plunging market share in traditional mortgage-related securities pushed Fannie Mae into a then-thriving private subprime market, as it sought to serve two masters – private shareholders and its public mission of helping Americans attain affordable housing.
Fannie’s former CEO Daniel Mudd testified today before the Financial Crisis Inquiry Commission on the panel’s final day of testimony.
“Homeownership rates probably rose too high…I wish I could have maintained the delicate balances of the roles assigned to Fannie Mae, and I am sorry that I could not,” Mudd said in prepared testimony.
The dual missions of Fannie Mae, and its smaller sibling Freddie Mac, clashed in historic measure by the fall of 2008, as the U.S. government seized its two sponsored enterprises. The tally so far in taxpayer bailouts: $127 billion.
The near collapse of Fannie and Freddie was fueled by their full charge into the market of private-label securities backed by subprime mortgages and “Alt-A” products, paper deemed somewhat less riskier than subprime.
Mudd said Fannie’s guaranteed subprime and Alt-A mortgages had default rates significantly lower than those held by Wall Street firms.
Nonetheless, “in the midst of turmoil, virtually every other investor fled the market, and the GSEs were specifically required to take up the slack,” Mudd said. “This role had survived several recessions, the Russian debt crisis of 1998, and the aftermath of 9/11.”
The roles of Fannie and Freddie are not to originate mortgages, but to acquire the loans to provide liquidity to the housing market and assist low-to-moderate income Americans in homeownership. Mudd, who was ousted in the U.S. “conservatorship” of the GSEs, spoke proudly of that mission.
“Fannie Mae financed tens of millions of homes for American families of low-to-moderate income. In the days when the yawning gap in homeownership between white and minorities was an issue of national concern, Fannie and Freddie narrowed the difference,” he said.
But both entities – now the targets of widespread criticism and calls for dismantling – struggled to keep pace with the radically unfolding real estate financing landscape.
Increasingly, Congress and succeeding presidential administrations expanded Fannie Mae’s role in fostering homeownership and affordable housing to underserved populations. By 2004, 50 percent of Fannie and Freddie’s business was required to serve those with below median incomes, Mudd said.
“There have been suggestions that Fannie Mae subordinated its mission to the pursuit of higher profitability, but I beg to differ …Fannie Mae devoted enormous time and resources in a good faith effort to meet its many mission requirements,” Mudd testified.
To succeed in the global financial marketplace, he said the GSEs had to deal with the market “as it was, not as they wished it to be.”
The “traditional sweet spot” of the Fannie and Freddie business model was the 30-year fixed rate mortgage, Mudd said. But from the late 1990s, through 2007, the market moved away from traditional 20 percent down and 30-year amortizing loans, he said.
The transformation caused Fannie’s market share to tumble, from 45 percent of single-family mortgage-related securities in 2003, to 23.7 percent in 2006.
“It became clear that the movement towards nontraditional products was not a fad, but a growing and permanent change in the mortgage marketplace, which GSEs (Fannie and Freddie) could not ignore,” Mudd said.

One thought on “Fannie Mae Ex-CEO: We had to ‘Take Up Slack’ in Crisis

  • October 4, 2011 at 11:51 am

    The phasing out of Fannie Mae and Freddie Mac will bring back private capital and banks to the real estate market and the playing field will be level for private capital investment. Borrowers will also be required to put down a larger down payment.

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