Former Fannie Mae CEO Daniel Mudd told a judge that he did not believe the U.S. Securities and Exchange Commission (SEC) had proven its claims that the government-sponsored enterprise was guilty of fraud in regards to its subprime mortgage portfolio in the run-up to the financial crisis, according to media reports.
Mudd, the CEO of Fannie Mae during the years leading up to the housing crash (2005 to 2008), and former Fannie Mae executives Enrico Dallavecchia (chief risk officer) and Thomas A. Lund (EVP), requested that Judge Paul Crotty in the U.S. District Court of the Southern District of New York grant them summary judgment on the grounds that the SEC had not shown evidence that the GSE misled or made false statements to investors about its subprime portfolio.
The SEC sued the Fannie Mae executives in December 2011, claiming that they attempted to shield from investors the amount of subprime and high risk mortgage loans held by the Agency by omitting two types of loans known as Expanded Approval and MyCommunityLoans from financial statements.
"Fannie Mae and Freddie Mac executives told the world that their subprime exposure was substantially smaller than it really was," said Robert Khuzami, Director of the SEC's Enforcement Division, at the time the lawsuit was filed. "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 on the company's books. 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."
The executives responded by saying that Expanded Approval and MyCommunityLoans, which were intended for borrowers with weaker credit, were excluded from the financial statements because they did not qualify as subprime loans under Fannie Mae's own qualification guidelines, according to reports. The defendants contend that investors had access to the Fannie Mae guidelines that define a subprime loan, and that a reasonable investor could have used that information to make informed judgments as to the Agency's involvement in subprime loans or any other type of mortgage loan.
According to reports, the SEC's complaint alleged that a Fannie Mae 2007 public filing said that the extent of Agency's involvement in single-family subprime mortgage loans amounted to $4.8 billion; however, the Agency held more than $57 billion worth of Expanded Approval and MyCommunityMortgage loans. In February 2008, which was seven months before Fannie Mae and Freddie Mac were taken into conservatorship by the Federal Housing Finance Agnecy, Fannie Mae reportedly had $90 billion worth of loans on the books but claimed only a small percentage of that was subprime loans. Crotty rejected a motion by the defendants in 2012 to have the SEC lawsuit dismissed; at that time, the judge called it "misleading" to not count Expanded Approval and MyCommunityMortgage Loans as subprime loans.