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Watchdog: Limit Fannie, Freddie legal fees more

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POSTED February 23, 2012 7:39 p.m.

WASHINGTON (AP) — The U.S. government regulator for Fannie Mae and Freddie Mac must do a better job limiting legal expenses paid by the two mortgage giants to their former executives facing lawsuits, a new watchdog report says.

A report issued Wednesday by the inspector general for the Federal Housing Finance Agency says Fannie and Freddie together have paid more than $109 million in legal expenses for former executives since 2004, with Fannie covering more than $99 million for just three top officials.

Taxpayers are footing the bill: The bailouts of the two companies have so far cost about $150 billion and that figure continues to grow.

The report says the agency should develop standard legal billing practices for Fannie and Freddie, expand its oversight and take other steps.

Fannie and Freddie buy mortgage loans from primary lenders, pool them, and sell them with a guarantee that investors will be paid even if borrowers default. The agencies have helped people buy homes at affordable interest rates.

But the two nearly collapsed in 2008, after the subprime mortgage market collapsed and defaults and foreclosures piled up. The government seized them in September 2008.

The report issued by the inspector general for the FHFA, Steve Linick, came a day after the agency submitted a plan to Congress that would shrink the mortgage giants' role in the housing market.

The proposal for a leaner Fannie and Freddie would mean that fewer mortgages are backed by the government. That could make buying a home more expensive because it would lead to higher interest rates. Under the plan, Fannie and Freddie could also increase its prices to guarantee loans and establish agreements with private investors to take on added credit risk.

The FHFA said in a memo that it agrees with the inspector general's recommendations to continue its efforts to control costs and that it "will work expeditiously." The agency's office of general counsel will heighten its scrutiny of legal costs, the memo said.

Fannie and Freddie and their former senior executives face several class-action lawsuits filed by shareholders and others, alleging securities fraud and other violations and seeking billions of dollars in damages.

In December, the Securities and Exchange Commission brought civil fraud charges against six former executives at the two companies, including former Fannie CEO Daniel Mudd and former Freddie CEO Richard Syron. The SEC accused the executives of understating the level of high-risk subprime mortgages that Fannie and Freddie held before the housing bubble burst in 2007.

Mudd said through his attorney that the government reviewed and approved all of Fannie's financial disclosures. Syron's lawyers said the term "subprime had no uniform definition in the market" at that time and that "there was no shortage of meaningful disclosures."

The inspector general's report says Fannie and Freddie has paid legal expenses for Mudd, Syron and the other four former executives sued by the SEC, but it did not provide the amounts. The report did say that Freddie has paid about $10.2 million in legal expenses for an unspecified number of officers and directors since September 2008.

The total legal expenses to be paid by the two companies ultimately could far exceed the $109.6 million specified in the report.

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