SEC Close to Settling Subprime Mortgage Risk Disclosure Claims Against Fannie and Freddie
On September 8, 2011, the New York Times reported that the Securities and Exchange Commission is close to settling claims that Fannie Mae and Freddie Mac failed to adequately disclose their subprime mortgage risk. The SEC investigation centers on whether the GSEs misled its regulators and the public regarding the nature and extent of risk they carried in connection with subprime mortgage purchases. According to the report, the civil settlement under discussion would not include any monetary penalty or admission of fraud.
The report of the settlement comes one week after Fannie and Freddie's regulatory, the Federal Housing Finance Agency, sued 17 firms to recover losses allegedly tied to mortgage-backed securities packed with subprime loans that were sold to Fannie and Freddie. (See FHFA press release.) A significant issue in the FHFA's case is whether Fannie and Freddie were aware of the risk associated with the subprime loans purchased from the 17 firms. As attorney Andrew Sandler recently noted in a Wall Street Journal article ("What Did Fannie, Freddie Know?", 9/6/2011), the firms sued by the FHFA will likely argue that Fannie and Freddie knew that the loans were risky when they were acquired, and that losses were due to economic conditions, not faulty underwriting. "It will become clear that the plaintiffs knew as much as the defendants about the quality of these loan portfolios," Sandler said in the article.
It remains to be seen whether the SEC settlement, which may include terms suggesting that Fannie and Freddie were aware of subprime loan risk in their portfolio, will impact or conflict with the FHFA's case.
