Financial Crisis Probe Puts Former Fannie Execs in the Spotlight

There's plenty of finger-pointing and opinions to go around in the heated debate over what caused the nation's financial meltdown of 2007. To get to the true[IMAGE]triggers, President Obama formed the ""Financial Crisis Inquiry Commission"":http://fcic.gov (FCIC), tasked with grilling ""hundreds"" of people from the investment community, large banks, mortgage industry, government agencies, and academia.

In January, committee members probed the ""chiefs of big banks"":http://dsnews.comarticles/crisis-committee-begins-probe-into-root-of-financial-meltdown-2010-01-14 and ""financial regulators."":http://dsnews.comarticles/crisis-commissions-inquest-turns-to-regulators-2010-01-15 This week, the commission held its second round of hearings, and the topic was ""Subprime Lending and Securitization and Government-Sponsored Enterprises."" On Friday, it was former president and CEO of Fannie Mae, Daniel Mudd, and the GSE's former chief business officer, Robert Levin, in the hot seat.

The two execs said it was Wall Street firms muscling in on the mortgage-backed securities (MBS) market and pinching the GSEs' business that led Fannie Mae to take greater risks in the years before the mortgage crisis.

""Fannie Mae's market share fell from its historical level of approximately 40 percent to nearly 20 percent, as the private sector, including banks, Wall Street, and mortgage

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specialist, moved into the market,"" Mudd told the FCIC. ""[But] in the midst of the turmoil,"" he said, ""virtually every other investor fled the market, and the GSEs were specifically required to take up the slack.""

In addition, Levin said, ""Because Fannie Mae, unlike other financial institutions, was restricted by its charter to one class of assets, Fannie Mae took the brunt of the crisis head on.""

According to both Mudd and Levin, the housing goals Fannie Mae's regulator set for the GSE to meet weren't in line with market demand. The company was forced to adopt ""different underwriting and pricing standards,"" in particular for nontraditional subprime and Alt-A loan products, to create business in order to meet these goals, Levin explained.

In his testimony, Mudd said, ""It became clear that the movement towards nontraditional products was not a fad, but a growing and permanent change in the mortgage marketplace, which the GSEs could not ignore.""

Levin also noted that Fannie's charter as a public and private entity created ""conflicting objectives.""

Mudd concurred, saying his ""ultimate assessment [is] that the cause of the GSEs' troubles lies with their business model.""

It's precisely this thinking that has Congress and the administration dead-set on reshaping the mortgage finance market and the structure of the GSEs.

The FCIC's inquisition will continue over the months ahead, taking aim at such topics as complex financial derivatives, credit rating agencies, the shadow banking system, and ""too big to fail."" The commission will report its conclusions on December 15.