WASHINGTON -- 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. Both executives left Fannie Mae after it was seized by regulators in fall 2008.
Mudd stopped short of a full apology for the company's collapse and the more than $75 billion it has cost taxpayers so far. But, he said, "I accept responsibility for everything that happened on my watch."
Just before the housing bust, Fannie Mae executives worried the mortgage finance company was becoming irrelevant. Wall Street firms had muscled into the mortgage-backed securities business and were stealing market share, according to a July 2005 internal presentation disclosed by the panel.
While executives were aware of "growing concern about housing bubbles," the presentation said, they also feared the company could become a "niche player" amid competition from Wall Street. "Could we really sit out?" Levin told the panel. "Would we be permitted to sit out? That's what we were grappling with."
Short-term concerns ultimately prevailed, and Fannie dived increasingly into riskier loans, such as those that didn't require proof of income.
Then, 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."
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. Its report is due Dec. 15. Members of the panel blasted the executives for failing to plan for a drop in home prices, and Mudd conceded that the company was consistently surprised as prices fell.
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.
Also appearing Friday were James Lockhart and Armando Falcon, both of whom headed up the federal regulator for Fannie and Freddie.
Falcon said the companies' failure "was deeply rooted in a culture of arrogance and greed." He accused the companies of trying to block the regulator.
Lockhart said the level of capital the companies were required to hold to guard against losses was set by Congress and was "razor thin," he said.