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34 FORMER FANNIE MAE CEO TESTIFIES IN FHFA V. NOMURA TRIAL Former Fannie Mae CEO Daniel Mudd took the witness stand in a Manhattan federal court in March in the trial of the Federal Housing Finance Agency (FHFA) v Nomura Holdings in which FHFA is seeking $1.1 billion in damages over losses suffered when the housing crisis hit. e agency alleged it suffered monumental losses when the sponsor of certain mortgage- backed securities, Nomura, and the securities' underwriter, Royal Bank of Scotland (RBS), did not follow underwriting guidelines on 68 percent of a sample of a bundle of securities backing more than $2 billion worth of mortgages sold to the GSEs prior to the financial crisis of 2008. Mudd, who left Fannie Mae in 2008 after it was taken over by FHFA, was subpoenaed by Nomura and RBS to testify in the trial, according to the report. Mudd reportedly testified in the trial that certain macroeconomic factors, including housing prices, could possibly have an impact on investments such as mortgage-backed securities. When he was asked if Fannie Mae could have predicted the magnitude of the housing crash, Mudd said the GSE's predictions "undershot" what eventually happened and that to his knowledge, no one at Fannie Mae could have accurately predicted the extent of the housing crisis. Judge Denise Cote is overseeing the non-jury trial, which began on March 16 in the U.S. District Court of the Southern District of New York in Manhattan. Nomura, which is headquartered in Japan and is one of the world's biggest banks, and the Royal Bank of Scotland are the first financial institutions to go to trial out of the 18 lenders FHFA sued in 2011 to recoup U.S. taxpayer costs following the government's $188 billion bailout of Fannie Mae and Freddie Mac in 2008, when the government seized control of both enterprises. e other 16 lenders have paid a combined total of about $24 billion to settle with FHFA. OPINIONS ON THE PROSPECT OF GSE REFORM GROW SOUR GSE reform is a hot topic among govern- ment officials and stakeholders within the housing industry. But opinions on the prospect of any meaningful reform coming in the near future are becoming more and more pessimistic. e Federal Reserve Bank of New York recently issued a report stating that the "path forward for reform of Fannie Mae and Freddie Mac does not look promising" and that failure to wind down the GSEs equated to a "colos- sal missed opportunity" to put U.S. residential housing finance on more stable footing. e Federal Housing Finance Agency (FHFA) took Fannie Mae and Freddie Mac under conservatorship in September 2008 at the height of the financial crisis. In 2008, the two GSEs needed a combined $188 billion bailout from the government to stay afloat; they returned to profitability in 2012. Despite now making billions per year in profits, the two GSEs remain in conservatorship. Sen. Richard Shelby (R-Alabama), chair- man of the Senate Banking Committee, said in a recent speech at the U.S. Chamber of Com- merce Conference in Washington, D.C., that he would rather leave the two GSEs under control of the FHFA than to replace them with a private insurance company system with a government backstop. Shelby's sentiments were similar to those expressed in a white paper released in March by the Office of the Inspector General of the FHFA on the future of Fannie Mae and Freddie Mac. "Absent Congressional action, or a change in FHFA's current strategy, the conservatorships will go on indefinitely," wrote Acting Deputy Inspector General for Evaluations Kyle Roberts in the white paper. "e Enterprises' future status is beyond their control. At present, it ap- pears that Congressional action will be needed to define what role, if any, the Enterprises play in the housing finance system." e New York Fed reported public actions supporting the GSEs succeeded in supporting the housing market and removing the GSEs as an "immediate source of systemic risk to the financial system. However, the conservatorships have not yet achieved the goal of reforming the system of residential mortgage finance." e report cited a white paper on federal mortgage reform issued jointly by HUD and Treasury in February 2011, just two years into the Obama Administration, which then-Treasury Secretary Timothy Geithner described as a fundamental plan to wind down the GSEs; however, the New York Fed said the white paper was just a "plan to develop a plan" and offered no specifics as to how to achieve the reform despite offering three broad possible alternatives. e New York Fed, in its report, quoted former Treasury Secretary Henry Paulson as saying in his 2010 book that the conservatorships of the two GSEs was as essentially intended to be a "time out," or a tem- porary holding period, while the government determined how to restructure Fannie Mae and Freddie Mac. "e key recommendation of the U.S. Treasury and U.S. Department of Housing and Urban Development (2011) white paper—that Fannie Mae and Freddie Mac should be wound down—would in fact not come to pass," the New York Fed wrote. "is would be a colossal missed opportunity to put U.S. residential mortgage finance on a more stable long-term footing." Six and a half years after the government seized control of Fannie Mae and Freddie Mac, there is no longer the same "urgency" to wind down the GSEs as there was in the years im- mediately following the crisis. "As time passes since September 2008, the perceived urgency for reform seems to recede," the New York Fed wrote. "Delay prolongs the uncertainty over the government's future role in residential mortgage finance, which in turn is a deterrent to private capital re-entering the market, and makes the government's role appear more difficult to replace. Delay also raises the likelihood that deeper reform will be judged as too difficult to accomplish, and raises the risk that the conservatorships are ended by returning Fannie Mae and Freddie Mac to private status with only minor changes to their charters."

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