Subprime smoking gun

Since Sept. 7, when the Treasury Department assumed control of massive lenders Fannie Mae and Freddie Mac, the search has raged for a smoking gun to pin blame for the near collapse on top executives-and so absolve government of its responsibility in encouraging subprime loans with affordable housing mandates. Capitol Hill now appears to have found just the evidence to fit that bill.

Internal documents, obtained by The Washington Post, reveal that executives understood the risks associated with their foray into the subprime netherworld. David Andrukonis, the former lead enterprise risk officer at Freddie who left in 2005, reportedly warned that the company was taking on loans with unqualified borrowers and pushing products in minority communities that some might perceive as predatory.

Fannie credit officer Adolfo Marzol likewise voiced concerns. A 2005 note to chief executive Daniel Mudd warned that subprime borrowers may not understand the terms and risks of their loans and that rating agencies might not have properly assessed such creative financing options.

But such revelations may prove more dripping water pistol than smoking gun. Understanding risk carries with it no requirement to avoid it. Indeed, the absence of an internal dialogue on subprime risk would be more surprising than its presence. Even Andrukonis, who at times showed frustration with executives' refusal to heed his council, acknowledged that pulling out of the subprime market could cost $50 million annually. That kind of severe blow to shareholders might have incurred as much criticism and scrutiny as the matter at hand. The question stands as to whether Fannie and Freddie moved forward imprudently or simply followed government mandates to serve low-income borrowers and got unlucky when the housing bubble burst.

One matter not in question: The decision of Fannie and Freddie to press forward into the subprime market set the tone for many banks to follow. The companies apparently knew as much. According to The Washington Post, an internal email reveals a discussion about banks modeling their products to what Fannie was buying. Andrukonis expressed concern that Freddie was leading the market into offering high-risk stated-income loans, which require no documented proof of income.

Such evidence may well impugn the business sense of Fannie and Freddie bosses. But it should not obscure the folly of the housing-for-all mandate from elected officials, many of whom now seem intent on masquerading as whistleblowers.