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Debra Borchardt
Updated from 12:33 p.m. EDT.
Unheeded warnings four years ago about the quality of loans it was financing are now coming back to haunt Freddie Mac(FRE Quote) CEO Richard Syron.
The New York Times on Monday reported that former risk officer David Andrukonis in 2004 sent a memo to Syron that cautioned against financing questionable loans and stating concerns about the underwriting standards. The key risk that Freddie Mac faced was a decline in the valuation of homes and the only way to lessen the pain should that happen, was to be conservative in its lending.
Syron, however, was also under pressure from Congress to continue to purchase more loans from low-income borrowers. Even President Bush in 2004 issued policy statements in support of low-income home ownership. So Syron ignored the warnings and continued to push for more mortgages in an effort to placate politicians. In February, Bush authorized Freddie to increase its loan limits to $729,750 as jumbo lender Thornburg Mortgage(TMA Quote) came under pressure.
Freddie Mac was under increasing pressure from the government to continue lending even as public lenders began to show signs of distress. Freddie Mac engaged in various hedge strategies to overcome any risks, except the one it couldn't fight -- wide scale home devaluation. Syron also benefited handsomely from the efforts as he has collected some $38 million in compensation since 2003.
The CEO has also come under fire for the balance sheet situation as well. The paper reported that the head of capital compliance Donald Solberg counseled Syron to maintain a think capital cushion. Both Treasury Secretary Henry Paulson and Federal Reserve chairman Ben Bernanke urged the company to raise more capital. Fellow government-sponsored entity Fannie Mae(FNM Quote) raised $14.4 billion over a six month period beginning in November 2007.
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