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 FINANCIAL CRISIS INQUIRY COMMISSION REPORT

associate director at FHFA after that agency replaced OFHEO, concurred; in his view,
Fannie’s forecasting capabilities were not particularly well thought out, and lacked a
variety of stress scenarios. Both officials noted Fannie’s weak forecasting models,
which included hundreds of market simulations but scarcely any that contemplated
declines in house prices. To Austin Kelly, an OFHEO examination specialist, there
was no relying on Fannie’s numbers, because their “processes were a bowl of
spaghetti.” Kerr and a colleague said that that they were struck that Fannie Mae, a
multitrillion-dollar company, employed unsophisticated technology: it was less tech-
savvy than the average community bank. 
Nonetheless, OFHEO’s communications with Fannie prior to September  did
not fully reflect these criticisms. FHFA officials conceded that they had made mis-
takes in their oversight of Fannie and Freddie. They paid too much attention to fix-
ing operational problems and did not react to Fannie’s increasing credit risk.
Lockhart told the FCIC that more resources should have been dedicated to assessing

credit risk of their mortgage assets and guarantees. Current FHFA Acting Director
Edward DeMarco told the FCIC that it would not pass the “reasonable person test”
to deny that OFHEO took its eye off the ball by not paying sufficient attention to
credit risk and instead focused on operational risk, accounting and lack of audited
results. 
To Mudd and others, OFHEO’s mistakes were not surprising. Mudd told the
FCIC that the regulators’ skill levels were “developing but below average.” Henry

Cisneros, a former housing and urban development secretary, expressed a similar
view. “OFHEO,” Cisneros told the FCIC, “was puny compared to what Fannie Mae
and Freddie Mac could muster in their intelligence, their Ivy League educations, their
rocket scientists in their place, their lobbyists, their ability to work the Hill.” 
The costs of the bailouts have been enormous and are expected to increase. From
January , , through the third quarter of , the two companies lost  bil-
lion, wiping out  billion of combined capital that they had reported at the end of
 and the  billion of capital raised by Fannie in . Treasury narrowed the
gap with  billion in support. FHFA has estimated that costs through  will
range from  billion to  billion. The Congressional Budget Office has pro-
jected that the economic cost of the GSEs’ downfall, including the total financial
cost of government support as well as actual dollar outlays, could reach  billion
by .

“WASN’T DONE AT MY PAY GRADE”

Fannie’s two most senior executives were asked at an FCIC hearing how their charter
could have been changed to make the company more sound, and to avoid the multi-
billion-dollar bailout. Mudd, who made approximately  million from  to
, testified that “the thing that would have made the institution more sound or
have produced a different outcome would have been for it to have become over time
a more normal financial institution able to diversify, able to allocate capital, able to be