September 8, 2011, 10:00 pm
Settlement Said to Be Near for Fannie and Freddie
By BEN PROTESS and AZAM AHMED
Daniel Rosenbaum for The New York Times
Robert Khuzami, the Securities and Exchange Commission enforcement chief, is said to have met this summer with lawyers for ex-chiefs of Freddie and Fannie.
Regulators are nearing a settlement with Fannie Mae and Freddie Mac over whether the mortgage finance giants adequately disclosed their exposure to risky subprime loans, bringing to a close a three-year investigation.
The proposed agreement with the Securities and Exchange Commission, under the terms being discussed, would include no monetary penalty or admission of fraud, according to several people briefed on the case. But a settlement would represent the most significant acknowledgement yet by the mortgage companies that they played a central role in the housing boom and bust.
The criminal inquiry has sputtered to a halt. The Justice Department has concluded its inquiry, at least at Freddie Mac, according to a securities filing in August by the company. No charges have been filed against either company.
At the S.E.C., regulators have zeroed in on the fine print of Fannie’s and Freddie’s disclosures, according to those who have been briefed on it. The agency is specifically looking at the way the companies reported their subprime mortgage portfolios and concentrations of loans extended to borrowers who offered little documentation.
While Fannie and Freddie do not offer home loans, they buy thousands of mortgages from lenders and resell them in packages to investors. The S.E.C.’s case hinges on whether the companies misled the public and regulators by lowballing the number of high-risk mortgages on their books.
One potential weakness of the case is that it hinges on the definition of subprime, which the government itself has struggled to nail down. The term often references loans to borrowers with low credit scores and spotty payment records. But Fannie and Freddie categorized loans as prime or subprime based on the lender rather than on the loan itself.