Ex-Fannie execs claim loans didn't meet subprime criteria
Attorneys for three Fannie Mae officials sued by the Securities and Exchange Commission asked a judge to dismiss the case on grounds that allegedly hidden — and risky — loans didn’t meet company definitions as subprime or Alt-A loans.
In December, The SEC accused the officials, among them former CEO Daniel Mudd, of misleading investors about the amount of subprime mortgages in Fannie’s portfolio.
But because those loans didn’t fit Fannie’s explicit classifications, lawyers for the officials said, those loan volumes cannot be considered an illegal misrepresentation.
The defense attorneys filed their motion to dismiss Friday. SEC spokeswoman Florence Harmon declined to comment.
In the complaint, the SEC said Fannie disclosed $8 billion of subprime loans on its books in the second quarter 2008, shortly before the government placed them into conservatorship. Fannie actually held far more, $110 billion, according to the agency.
The SEC also said Mudd and two other officials hid the extent of so-called “Alt-A” mortgages, a high-risk loan that requires little documentation. Fannie said they made up 11% of its single-family portfolio in March 2007, but the SEC said it was actually 18%.
Defense for the Fannie officials also said the company “was under no duty to use any particular definition of subprime or Alt-A,” and said Fannie continues to use its own parameters.
Fannie Mae has since stopped its acquisition of newly originated Alt-A and subprime loans.
A spokesman for the government-sponsored enterprise declined to comment.
According to 2007 and 2011 year-end regulatory filings, Fannie Mae still relies on the lender for classification of these loans. But in the 2011 10-K, the company cautions that it holds other loans similar to subprime and Alt-A but that don’t fit those particular definitions.
It’s common practice for defense attorneys to file a motion to dismiss, according to Jeffrey Manns, a securities law professor at George Washington University. In general, they use it as an opportunity to challenge the case on strictly legal grounds, regardless of whether the complaint’s assertions are true.
But most motions usually fail, especially against agencies like the SEC, Manns said.
“I would not necessarily read anything extraordinary into the motion to dismiss,” he said. “The SEC would not bring lightly the charges of this sort.”
The SEC has until May 21 to file a response to the motion, with the defendants’ reply due June 18th. Oral arguments could move forward as soon as the end of June.
Three former Freddie Mac officials were also sued by the SEC on similar grounds.