The Real Deal Miami

Fannie Mae, Freddie Mac near settlement

September 09, 2011 01:56PM

Fannie Mae and Freddie Mac could be close to a settlement with the
Securities and Exchange Commission, the New York Times reported, over whether the companies adequately disclosed their exposure to risky subprime loans. Under
the proposed agreement, there would be no monetary penalty or
admission of fraud. But the settlement would represent the most
significant acknowledgement yet by the mortgage companies that they
played a central role in the housing boom and bust, according to the
Times. The negotiations between Fannie and Freddie have been
going on since at least early summer, and a deal may not be realized
until later this year.

The investigation, which initially included
civil and criminal elements, started three years ago. Fannie Mae,
Freddie Mac and the SEC all declined to comment. So far no charges
have been filed, and so a civil settlement could be the only
government action against the companies.

The S.E.C.’s case hinges on whether the companies misled the public
and regulators about he number of high-risk mortgages on their books,
according to the Times. But a potential weakness of the case is that
it also depends on the definition of subprime, which the government
has struggled to nail down. The term often references loans to
borrowers with low credit scores and uneven payment records. But
Fannie and Freddie categorized loans as prime or subprime based on the
lender rather than on the loan itself. While both companies did not
view the government’s case as strong, they are interested in settling
to spare time and resources, as they battle weak morale from the
housing crisis.The Obama administration has announced plans to phase
out the two companies
, meaning that the future of government-backed
housing finance is in doubt. [NYT]