Fannie and Freddie spending lavishly on lawyers

Dec. 29 (Bloomberg) -- Chuck Gabriel, an analyst at Capital Alpha Partners LLC, talks about the outlook for overhauling Fannie Mae and Freddie Mac, which were seized by the federal government in 2008. Gabriel speaks with Peter Cook on Bloomberg Television's "Fast Forward." (Source: Bloomberg)
Washington Post Staff Writer
Monday, January 24, 2011; 7:57 PM

Taxpayer-backed Fannie Mae and Freddie Mac have made a lot of money for a lot of lawyers since the government seized them 21/2 years ago.

In that time, the companies have spent more than $160 million to defend themselves and their former executives in lawsuits and showered another $50 million on foreclosure lawyers who are now under investigation in Florida.

Most notably, Fannie Mae has spent $24 million to defend former chief executive Franklin D. Raines, former chief financial officer J. Timothy Howard and former controller Leanne G. Spencer, mostly in cases stemming from a huge accounting fraud at the company in the middle of the past decade.

The figures were contained in a document reviewed by The Washington Post and a statement released by Rep. Randy Neugebauer (R-Tex.), who is chairman of the House Financial Services Committee's oversight subcommittee and requested the information months ago. They were first reported Monday in an article in the New York Times.

Fannie and Freddie provide liquidity to mortgage markets by buying and guaranteeing loans and packaging them into securities that can be sold to investors, which frees lenders to make more loans.

The legal fees the firms have paid pale in comparison to what they have received from taxpayers to offset the massive losses they experienced during the financial crisis. To date, taxpayers have extended more than $130 billion in financial support.

To some critics of the companies, there is a sharp incongruity in the fact that Fannie and Freddie must use some of that taxpayer money to pay outside lawyers to defend the former executives who steered the firms in the wrong direction.

Neugebauer questioned whether the Federal Housing Finance Agency, which oversees the companies and approved the fee payments, was doing all it could to strengthen the companies' finances. Fannie and Freddie are under FHFA's control in a legal form called conservatorship, whereby FHFA is charged with preserving their assets.

"My investigation raises serious questions about the conservators' responsibilities to prevent any further losses to the American taxpayer," Neugebauer said in a statement. "Are the conservators looking out for the taxpayers? Do they have the right tools and structure to do so? My intent is to investigate other activities occurring within Fannie Mae and Freddie Mac that diminish the taxpayers' potential recovery and minimize capital infusion."

The Obama administration is set to release a plan to overhaul Fannie, Freddie and the nation's mortgage finance system in coming weeks. Republicans have been sharply critical of the companies' role in the financial crisis and want to eliminate the firms. Democrats have been more circumspect, critical of Fannie and Freddie but more supportive of the idea of the government providing support for the mortgage market.

The FHFA says many of the payments are contractually obligated.

In a statement, FHFA acting director Edward J. DeMarco said that he understands "the frustration regarding the advancement of certain legal fees associated with ongoing litigation involving Fannie Mae and certain former employees."

He added, "It is my responsibility to follow applicable federal and state law. Consequently, on the advice of counsel, I have concluded that the advancement of such fees is in the best interest of the conservatorship."

Some congressional aides question whether Fannie and Freddie should stop making the payments and let the former executives' lawyers sue to prove that the payments are merited.

In the mid-2000s, Fannie and Freddie both faced massive accounting scandals in which the companies paid fines to settle allegations that they manipulated earnings to boost executive bonuses.

The fee payments are expected to continue, as lawsuits stemming from the accounting scandals continue to wind their way through the legal system.

Lawyers who have represented Raines, Howard and Spencer in these cases did not respond to e-mails and telephone messages seeking comment.

The figures reviewed by The Post also showed that Fannie and Freddie's business in recent years has been lucrative for the law firms in Florida that are now under investigation by the state's attorney general for potentially fraudulent foreclosure practices.

These firms served as outside counsel for Fannie and Freddie as they worked to file thousands of foreclosure claims in the state, which was hit hard by the housing downturn. But, according to the Florida attorney general, many of the firms took shortcuts and ignored legal requirements, throwing into question the legality of many foreclosures.

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