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Settlement Said to Be Near for Fannie and Freddie

Regulators are nearing a settlement with Fannie Mae and Freddie Mac over whether the mortgage finance giants adequately disclosed their exposure to risky subprime loans, bringing to a close a three-year investigation.

The proposed agreement with the Securities and Exchange Commission, under the terms being discussed, would include no monetary penalty or admission of fraud, according to several people briefed on the case. But a settlement would represent the most significant acknowledgement yet by the mortgage companies that they played a central role in the housing boom and bust.

And the action, however limited, may help refurbish the S.E.C.’s reputation as an aggressive regulator, particularly as the country struggles with the aftereffects of the financial crisis that the housing bubble fueled.

But the potential settlement — even it if it is little more than a rebuke — comes at an awkward time for Fannie Mae and Freddie Mac. Last week, the government overseer of the two companies sued 17 large financial firms, blaming them for luring the mortgage giants into buying troubled loans. That is a similar accusation to the one the S.E.C. is leveling at Fannie and Freddie — that the two entities misled their own investors. The case against the financial firms could be complicated should Fannie and Freddie sound a note of contrition for their own role in the implosion of the mortgage market in settling with the S.E.C.

The agency abandoned hopes of assessing a fine because of the precarious financial positions of the two companies, according to the people briefed on the case, who spoke on condition of anonymity because the deal was not yet final. The government has already propped up Fannie Mae and Freddie Mac with more than $100 billion since taking control of them in 2008. Any fee levied against them would simply wind up on the taxpayers’ tab.

The negotiations have been going on since at least early summer, and a deal may not materialize until later this year, these people cautioned. Fannie Mae, Freddie Mac and the S.E.C. all declined to comment.

The sprawling investigation into Fannie Mae and Freddie Mac once encompassed both civil and criminal elements, making headlines as one of the most significant cases to stem from the financial crisis. The case also threatened to ensnare some of Fannie and Freddie’s former top officials. Earlier this year, recent chief executives at both companies received so-called Wells notices from the S.E.C., an indication that the agency was considering a civil enforcement action against them.

But three years on, the civil settlement would be the only government action against the companies.

The criminal inquiry has sputtered to a halt. The Justice Department has concluded its inquiry, at least at Freddie Mac, according to a securities filing in August by the company. No charges have been filed against either company.

At the S.E.C., regulators have zeroed in on the fine print of Fannie’s and Freddie’s disclosures, according to those who have been briefed on it. The agency is specifically looking at the way the companies reported their subprime mortgage portfolios and concentrations of loans extended to borrowers who offered little documentation.

While Fannie and Freddie do not offer home loans, they buy thousands of mortgages from lenders and resell them in packages to investors. The S.E.C.’s case hinges on whether the companies misled the public and regulators by lowballing the number of high-risk mortgages on their books.

One potential weakness of the case is that it hinges on the definition of subprime, which the government itself has struggled to nail down. The term often references loans to borrowers with low credit scores and spotty payment records. But Fannie and Freddie categorized loans as prime or subprime based on the lender rather than on the loan itself.

The path to the current settlement talks at Fannie Mae and Freddie Mac has been a delicate one. While internally, the two companies did not view the government’s case as particularly strong, they said they moved to settle to spare time and precious resources, according to one person close to the talks. In addition, the companies asked that whatever the settlement, it not include a fine or accusations of fraud in the hopes of protecting an already battered morale and an empty purse at the institutions.

In particular, a fraud accusation could cause an exodus of the employees best equipped to dig the institutions out of their current morass, people close to the talks said. A settlement with the mortgage companies would be a first step in wrapping up the S.E.C.’s broader examination. The agency is still pursuing potential claims against at least four former executives at Fannie and Freddie.

This summer, lawyers for Richard Syron, the former chief of Freddie Mac, and Daniel H. Mudd, his counterpart at Fannie Mae, met with the S.E.C.’s enforcement chief, Robert Khuzami, according to some of the people briefed on the case.

The S.E.C. has sent Wells notices to Mr. Syron; Mr. Mudd; the former chief financial officer at Freddie Mac, Anthony J. Piszel; and Donald J. Bisenius, executive vice president at Freddie until his recent departure.

None of the individuals have been accused of any wrongdoing.

Mr. Mudd and Mr. Syron are the two most prominent executives swept up in the case. Mr. Mudd is now chief executive of the public traded hedge fund and private equity firm Fortress Investment Group. Mr. Syron, a former president of the American Stock Exchange, is an adjunct professor at Boston College and serves on its board of trustees.

Through their lawyers, Mr. Mudd and Mr. Syron declined to comment. The S.E.C. could yet decide not to sue the former executives.

Ultimately, the two mortgage companies have larger worries to confront than the potential citations: chief among them is their continuing viability.

Earlier this year, the Obama administration announced plans to wind down the two companies, leaving the fates of the companies unresolved and the future of government-backed housing finance in doubt.

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