Fannie, Freddie Ex-Officials Are Accused of Fraud

U.S. securities regulators sued six former top executives at Fannie Mae and Freddie Mac on Friday, saying they misled the government and taxpayers about risky subprime mortgages the mortgage giants held during the housing bust.

Jin Lee | Bloomberg | Getty Images Daniel Mudd, former chief executive officer of Fannie Mae and current chief execuitve officer of Fortress Investment Group LLC.

The U.S. Securities and Exchange Commission sued three former executives at Fannie Mae and three at Freddie Mac. Those charged include the agencies' two former CEOs, Fannie's Daniel Mudd and Freddie's Richard Syron. They are the highest-profile individuals to be charged in connection with the 2008 financial crisis.

In a statement released through his attorney, Mudd said the lawsuit "should never have been brought" and said the government reviewed and approved all of the company's financial disclosures.

"Every piece of material data about loans held by Fannie Mae was known to the United States government to the investing public," Mudd said. "The SEC is wrong, and I look forward to a court where fairness and reason — not politics — is the standard for justice."

Syron's lawyer couldn't be immediately reached for comment.

According to the lawsuit, Fannie told investors in 2007 that it had roughly $4.8 billion worth of subprime loans on its books, or just 0.2 percent of its portfolio. The SEC said that Fannie actually had about $43 billion worth of products targeted to borrowers with weak credit, or 11 percent of its holdings.

Mudd told a congressional panel in March 2007 that Fannie's subprime business represented less than "2 percent of our book." He also said the company held subprime mortgages "very carefully."

Freddie told investors in 2006 that it held between $2 billion and $6 billion of subprime mortgages on its books. The SEC said its holdings were actually closer to $141 billion, or 10 percent of its portfolio in 2006, and $244 billion, or 14 percent, by 2008.

In a May 2007 speech in New York, he said Freddie had "basically no subprime exposure," according to the suit.

"Fannie Mae and Freddie Mac executives told the world that their subprime exposure was substantially smaller than it really was," said Robert Khuzami, SEC's enforcement director. "These material misstatements occurred during a time of acute investor interest in financial institutions' exposure to subprime loans, and misled the market about the amount of risk."

CNBC Robert Khuzami, SEC's enforcement director

Fannie and Freddie own or guarantee about half of U.S. mortgages, or nearly 31 million loans. The Bush administration seized control of the mortgage giants in September 2008.

So far, the companies have cost taxpayers almost $150 billion — the largest bailout of the financial crisis. They could cost up to $259 billion, according to its government regulator, the Federal Housing Finance Administration.

The other executives charged were Fannie's Enrico Dallavecchia, 50, a former chief risk officer, and Thomas Lund, 53, a former executive vice president; and Freddie's Patricia Cook, 58, a former executive vice president and chief business officer, and Donald Bisenius, 53, a former senior vice president.

Lund's lawyer, Thomas Levy, said in a statement that Lund "did not mislead anyone." Lawyers for the other defendants declined to comment Friday morning.

The case was filed in federal court in New York City.