HousingWire Magazine

January 2012

Issue link: http://magazine.housingwire.com/i/53470

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Investments Departments Former Fannie, Freddie execs charged with securities fraud MBIA moves to limit CMBS exposure BOND INSURER MBIA said it has com- muted $20 billion of its insured expo- sure since the beginning of the fourth quarter to shield the company from fu- ture risks on volatile commercial mort- gage-backed securities. The bond insurer said in a regulatory filing that the undisclosed amount MBIA agreed to pay exceeds aggregate statu- tory loss reserves. The process of commutation essen- tially allows MBIA to pay an insured party — or a client who has insurance through MBIA covering CMBS — a certain amount to cover projected risks on current and The Securities and Exchange Commission charged six former executives of Fannie Mae and Freddie Mac with securities fraud. The regulator took aim at several former top execu- tives of the mortgage giants by filing numerous secu- rities charges alleging they misrepresented the gov- ernment-sponsored enterprises' exposure to volatile subprime mortgages. Meanwhile, both GSEs released statements suggesting the firms have reached agree- ments with the SEC. Complaints were filed against former Fannie Mae CEO Daniel Mudd, former Fannie Chief Risk Officer Enrico Dallavecchia and Thomas Lund, former EVP of Fannie's single-family mortgage business. In addition, former Freddie Mac CEO and Chair- man Richard Syron, Chief Business Officer Patricia Cook and the EVP for Freddie's single family guar- antee business, Donald Bisenius were charged for misrepresenting the companies holdings of sub- prime loans. The SEC claims former executives materially mis- stated their holdings of subprime mortgages in secu- rities filings with the regulator in public statements investor calls and media interviews. "Fannie Mae and Freddie Mac executives told the world that their subprime exposure was substantially 86 HOUSINGWIRE ❱ JANUARY 2012 smaller than it really was," said Robert Khuzami, Di- rector of the SEC's enforcement division. "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 impor- tant to the interest of our country's investors," Khu- zami said. The SEC contends Fannie Mae executives reported that 2006 single-family exposure to subprime loans was less than 0.2%, or $4.8 billion, of its single-fam- ily portfolio. "Investors were not told that in calculating the com- pany's reported exposure to subprime loans, Fannie Mae did not include loan products specifically targeted by Fannie Mae toward borrowers with weaker credit histories, including more than $43 billion of Expanded Approval, or "EA" loans," according to the SEC. The charges also allege Fannie executives approved of a decision to under report Alt-A loan exposure. Exec- utives said Fannie's exposure to Alt-A loans was at 11% in March 2007 when in fact it was approximately 18% of its single-family loan holdings, according to the SEC. future losses in exchange for isolating the company from future shocks on claims tied to this segment. The move suggests MBIA is taking note of commercial real estate risks in advance and recording losses now to shield itself from more claims. "The reduction in their balance sheet is impressive and removing volatile expo- sures significantly de-risks the company," said Manal Mehta of Branch Hill Capital. "It doesn't bother me that they paid $500 million more than statutory loss reserves to get rid of their most toxic ex- posures — commutations are voluntary so the company would have only done them if they were beneficial in terms of reducing future volatility associated with those exposures," Mehta said.

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