Government-backed mortgage giants Fannie Mae and Freddie Mac have spent nearly $100 million since 2004 to defend three former executives from lawsuits and other investigations, part of a mounting set of legal bills for the troubled companies, according to a newly released report from the inspector general of the Federal Housing Finance Agency.
The payments, which were included as part of compensation and benefits packages provided to officers and directors at Fannie and Freddie, underscore the uncomfortable and conflicting role the government faces as conservator for the firms, whose bad bets on risky home loans before the financial crisis have cost taxpayers more than $130 billion. Under those compensation agreements, Fannie and Freddie are obligated to pay all legal expenses for the executives involved, including advance payments for expenses incurred during the course of legal proceedings.
That means the independent FHFA, which oversees Fannie and Freddie, has the unenviable role of trying to help the mortgage companies avoid losses by defending ongoing lawsuits, while simultaneously trying to keep down the hefty costs of attorneys fees for former employees. It is a bind that appears to have no easy solution. In fact, the FHFA’s inspector general offered two recommendations in Wednesday’s report that will prove easier in theory than in reality — work to limit legal expenses to the extent “possible and reasonable,” and continue to try to control legal costs wherever practicable.
“FHFA and Fannie Mae believe that their options are limited in paying current legal fees for former officers and directors, which now amount to almost $100 million,” FHFA’s inspector general, Steve Linick, said in a statement, adding that his office “nonetheless believes that FHFA must continue its efforts to both control and scrutinize these legal expenses now and in the future.”
The key case cited in the report involved a pending case against Fannie Mae in which a trio of former senior executives — former Chief Executive Officer Franklin D. Raines, former Chief Financial Officer J. Timothy Howard, and former Controller Leanne G. Spencer – are accused of engaging in practices that artificially inflated the price of Fannie Mae’s publicly traded stock. Between 2004 and 2011, the report states, Fannie Mae advanced $99.4 million in legal expenses to cover the representation of Raines, Howard, and Spencer in connection with government investigations and lawsuits stemming from accounting irregularities uncovered in 2004. That amount includes $37 million that FHFA has permitted Fannie Mae to advance to the the three former officials since the companies were placed into conservatorship during the financial crisis.
The inspector general’s report comes a day after the FHFA released a plan for beginning to scale back Fannie and Freddie, even as the Obama administration is pressing the taxpayer-backed companies to do more to help homeowners.
The FHFA wants to wind down Fannie and Freddie primarily by increasing fees charged to borrowers who take out mortgages. The agency’s hope is that as the cost of receiving a taxpayer-backed mortgage goes up, more borrowers will turn to private lenders, whose loans do not carry government backing.