Former Fannie Regulators Say Resistance to Legislation Collapsed GSE into Conservatorship

Two former regulators of government-sponsored enterprise (GSE) Fannie Mae (FNM) told a congressionally-appointed panel that weak capital positions, over-leveraging and a general resistance to legislative reform brought down the private status of mortgage finance machine and landed Fannie in conservatorship. Their remarks are part of a hearing that concludes three days of testimony on the subprime mortgage market collapse. As HousingWire reported, other expert witnesses told the panel that public policy and competition within the subprime mortgage market fueled the system-wide risk that contributed to the current financial crisis. Former director of the Office of Federal Housing Enterprise Oversight (OFHEO) — the regulator that oversaw the GSEs prior to the formation of the Federal Housing Finance Agency (FHFA) — Armando Falcon Jr. blamed the crisis at Fannie Mae on “a failure of leadership.” During the third consecutive day of hearings held by the Financial Crisis Inquiry Commission (FCIC), Falcon said the failure was “deeply rooted in a culture of arrogance and greed.” He said Fannie and brother GSE Freddie Mac (FRE) made many “efforts to obstruct the regulatory process.” “[T]he Fannie and Freddie political machine resisted any meaningful regulation using highly improper tactics. OFHEO was constantly subjected to malicious political attacks and efforts of intimidation,” Falcon said in prepared remarks (download here). Former director of OFHEO — and, later, FHFA — James Lockhart told the FCIC the GSE’s “opposition” to reform legislation for so long “was a major mistake and extremely costly to their shareholders.” The legislation — the Housing and Economic Reform Act (HERA) — eventually passed with a provision that allowed the Treasury Department to fund a conservatorship of the GSEs as well as a senior preferred stock facility. Lockhart noted that, without those two key elements, the conservatorship would likely have failed and the financial crisis could have been much worse. He said reform of the GSEs, including capital requirements, was necessary to stabilize the mortgage finance market. Lockhart echoed earlier comments made to the FCIC that the US Department of Housing and Urban Development (HUD) mandated affordable housing goals for lower-income demographics that were not reflective of true market demand. “In retrospect, it is easy to see that HUD pushed the housing goals too high,” he told the FCIC in prepared remarks (download here). “At the end, requiring that 55% of their mortgages were made to below median income households was mathematically difficult and a mistake as was allowing them credit for the underlying mortgages in those subprime and other private label [mortgage-backed securities].” Write to Diana Golobay. Disclosure: the author holds no relevant investment positions.

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