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SEPTEMBER : THE TAKEOVER OF FANNIE MAE AND FREDDIE MAC 

Even after internal reports pointed to market problems, Fannie kept buying and
guaranteeing riskier loan products, FHFA said. “Despite signs in the latter half of
 and  of emerging problems, management continued activity in risky pro-
grams, and maintained its higher eligibility program for Alt-A loans without estab-

lishing limits.” The company also bought private-label securities backed by Alt-A

and subprime loans. Losses were likely to be higher than the GSEs had estimated,
FHFA found.
FHFA also noted “increasing questions and concerns” regarding Fannie’s account-
ing. The models it used to forecast losses had not been independently validated or
updated for several years. FHFA judged that in an up-to-date model, estimated losses
would likely show a “material increase.” In addition, Fannie had overvalued its de-
ferred tax assets. Applying more reasonable projections of future performance, FHFA
found this benefit to be significantly overstated. 
The -page report delivered to Freddie included similarly harsh assessments of
that GSE’s safety and soundness, but more severe criticisms of its management and
board. In particular, the report noted a significant lack of market confidence, which
had “eliminated the ability to raise capital.” FHFA, for its part, “lost confidence in the
Board of Directors and the executive management team,” holding them accountable
for losses stemming from “a series of ill-advised and poorly executed decisions and
other serious misjudgments.” According to the regulator, they therefore could not be
relied on, particularly in light of their widespread failures to resolve regulatory issues
and address criticisms. In addition, FHFA said that Freddie’s failure to raise capital
despite its assurances “invite[d]” the conclusion that the board and CEO had not ne-
gotiated “in good faith” about the capital surcharge reduction. 
As in its assessment of Fannie, FHFA found that Freddie’s unsafe and unsound
practices included the purchase and guarantee of higher-risk loan products in 
and  in a declining market. Even after being told by the regulator in  that its
purchases of subprime private-label securities had outpaced its risk management abil-
ities, Freddie bought  billion of subprime securities in each subsequent quarter.
FHFA also found that “aggressive” accounting cast doubt on Freddie’s reported
earnings and capital. Despite “clear signals” that losses on mortgage assets were likely,
Freddie waited to record write-downs until the regulator threatened to issue a cease
and desist order. Even then, one write-down was reversed “just prior to the issuance
of the second quarter financial statements.” The regulator concluded that rising
delinquencies and credit losses would “result in a substantial dissipation of earnings
and capital.” 

“THEY WENT FROM ZERO
TO THREE WITH NO WARNING IN BETWEEN”
Mudd told the FCIC that its regulator had never before communicated the kind of
criticisms leveled in the September  letter. He said the regulator’s “chronicling of the
situation” then was “inconsistent with what you would consider better regulatory
practice to be—like, first warning: fix it; second warning: fix it; third warning: you’re