(WASHINGTON) — Three years after taxpayers footed the bill to bail out mortgage giants Fannie Mae and Freddie Mac, the top six executives at the government-supported lenders were charged by the Securities and Exchange Commission with fraud for failing to disclose billions of dollars in risky subprime mortgages.
“Investors were robbed of the opportunity to make informed investment choices on whether or not to invest in the companies,” said Robert S. Khuzami, the SEC’s director of enforcement. “All individuals, regardless of their rank or position, will be held accountable for perpetuating half-truths or misrepresentations about matters materially important to the interest of our country’s investors.”
Khuzami said that starting in 2006, as Wall Street banks began to gobble up a larger portion of Fannie and Freddie’s market share, the two companies began downplaying the amount of risky loans they held.
“They sought to maintain the illusion that their businesses involved minimal and manageable credit risk,” Khuzami said. “They led investors to believe that Freddie Mac was disclosing subprime exposures, however that was not the case.”
The SEC suit alleges that while Freddie Mac’s CEO and executive vice president publically stated that the company had basically no subprime exposure, the company was in fact exposed to $141 billion in subprime loans in 2006. By 2008 these risky investments grew to $244 billion, or 14 percent of Freddie Mac’s portfolio.
Fannie Mae, the SEC claims, shares a similar story.
In 2007 Fannie Mae reported that only .2 percent, approximately $4.8 billion, of its Single Family loan portfolio was comprised of loans “made to borrowers with weaker credit histories” when in fact, the exposure to subprime loans was nearly ten times that amount, the SEC alleges.
The federal government took control of the two mortgage giants in 2008 after poor lending practices put them at the brink of bankruptcy. Fannie Mae and Freddie Mac have cost taxpayers $150 billion.
The commission has filed fraud charges against Freddie Mac’s Board Chairman and CEO Richard F. Syron, former Executive Vice President and Chief Business Officer Patricia L. Cook and Vice President Single Family Guarantees Donald J. Bisenius.
Fannie Mae’s former Chief Executive Officer Daniel H. Mudd, former Chief Risk Officer Enrico Dallavecchia, and former Executive Vice President of Single Family Mortgages, Thomas A. Lund have also been charged with fraud.
Because the SEC cannot press criminal charges, the executives do not face jail time. Under the civil charges they could be forced to pay fines and penalties that range from the hundreds of thousands into the low millions.
Copyright 2011 ABC News Radio
John Clyde, KSL.com
Elise Labott, Kevin Liptak and Patrick Oppmann, CNN
Ivana Kottasova, CNN