Freddie CEO Ignored Warnings, Report Says - TheStreet

Freddie CEO Ignored Warnings, Report Says

Richard Syron was warned as far back as 2004 about the government-sponsored mortgage giant's financing of risky loans, the New York Times says.
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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)

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)

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)

raised $14.4 billion over a six month period beginning in November 2007.

Freddie Mac, though, has been resistant and has only picked up $6 billion in a preferred stock deal in 2007. A $5.5 billion stock deal was planned, but because Syron delayed, the cost of raising that money has soared. The stock plunged to all-time lows in mid-July over fears of insolvency, but had recently started to fight its way back as Congress began work on a housing bill.

Freddie Mac on Tuesday afternoon offered a blistering response to the

Times

story, raising questions about whether the Andrukonis memo ever was put in front of Syron or even exists, saying Andrukonis left the company "involuntarily" and attributing other anonymous charges made in the story to a "well-worn band of ideologues and self-interested detractors who have opposed the GSE model for years."

"Maintaining the right balance between sometimes conflicting demands requires constant vigilance and judgment day in and day out as financial markets go up and down, competitors come and go, opponents attack and innovations drive product and process changes at an ever-increasing pace," the company said in the statement. "But the decisions we made were based on business judgments that were carefully considered based on all of these factors."

Freddie Mac will report its second quarter earnings on Wednesday. Analysts according to Thomson Reuters are forecasting a loss of 53 cents per share. Fannie Mae is expected to report its earnings on Friday and is estimated to report a loss of 69 cents per share.