Two former Fannie Mae executives said Friday that competitive pressures, combined with the political goal of increasing homeownership, were to blame for the company's decision to back riskier mortgages that fueled the housing bubble.
Daniel Mudd, Fannie Mae's former chief executive, and Robert Levin, the company's former chief business officer, testified before a panel examining the roots of the financial crisis.
Levin said company executives were concerned about losing relevance as Wall Street companies issued mortgage securities and stole market share.
"It posed a number of threats to the company," Levin told the panel, adding, "Could we really sit out? Would we be permitted to sit out? That's what we were grappling with."
As the market turned down, Mudd noted "virtually every other housing sector investor fled the market." Fannie and sibling company Freddie Mac "were specifically required to take up the slack."
Both executives left Washington-based Fannie Mae after it was seized by regulators in fall 2008. Also scheduled to appear Friday were James Lockhart and Armando Falcon, both of whom headed up the federal regulator for Fannie Mae and Freddie Mac.
The inquiry is being held by the congressionally chartered Financial Crisis Inquiry Commission. Congress created the commission last year to examine the causes of the crisis. The panel's goal is to get an in-depth understanding of decisions that inflated the mortgage bubble and triggered a financial crisis that tipped the economy into the longest recession in 70 years. Its report is due Dec. 15.
Fannie and Freddie buy mortgages from lenders and package them into bonds that are resold to global investors. As the housing bubble burst, they were unable to raise enough money to stay afloat, and the government effectively nationalized them in September 2008. That has cost taxpayers about $126 billion so far.
The role of Fannie and Freddie in the mortgage crisis is hotly debated in Washington. Republicans say the two companies, with the government's encouragement, deserve most of the blame for inflating the housing bubble. They argue that the two companies promoted homeownership to people who ultimately couldn't afford it.
But Democrats say Wall Street players were the primary culprits behind shady lending practices that led to the mortgage bust. They argue that Fannie and Freddie only lowered their lending standards to be competitive.
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