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Taxpayers Paid Millions In Fannie, Freddie Legal Fees

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The collapse of mortgage giants Fannie Mae and Freddie Mac has so far cost taxpayers nearly $150 billion. Depending on what happens to the housing market, that number could get much higher.

But there’s interest in a smaller, but still significant number: $160 million. That’s how much U.S. taxpayers have spent on legal fees to defend the firms and their former executives against pending lawsuits.

If you have a mortgage, there’s a good chance Fannie Mae or Freddie Mac had something to do with it. The firms buy mortgages from banks, bundle them up into securities and sell those securities off to investors.

Throughout the past decade, Fannie and Freddie and their top executives made some huge mistakes, including bad investments and bad decisions. In September 2008, the two massive firms became the responsibility of U.S. taxpayers.

And so did their legal fees.

“The fact that we are still paying those legal fees is a great concern to me and should be a concern to the American taxpayers,” says Rep. Randy Neugebauer (R-TX) who heads the subcommittee that oversees Fannie and Freddie. He requested the information about legal fees from the firms’ regulator, and then released the information.

“It brings the question, what other things are going on over there that might not be in place to minimize taxpayers’ exposure?” he says.

Fannie Mae has racked up most of the legal fees. And most relate to accounting irregularities that go back more than 10 years. Since the government stepped in, the firm has accumulated some $24 million in legal fees just to defend former top executives including one-time CEO Franklin Raines.

The executives are accused of manipulating Fannie’s books to boost company profits, which also increased their bonuses. One lawsuit ended in a settlement, with the executives neither admitting nor denying wrongdoing. Other suits remain outstanding.

The firms’ regulator defends paying the legal fees. And Charles Elson, a professor of corporate governance at the University of Delaware, says there’s really no choice.

“It’s one of these you can feel bad and be angry about it, but in the end, you’re not going to change very much and probably nor should you,” he says.

Elson says nearly all contracts for corporate executives include indemnification clauses that say the company will pay legal fees if there’s a lawsuit or criminal investigation. Otherwise, no one would take these sorts of jobs.

“Bottom line is until a court says that these people have acted badly, the company and obviously its owners, the taxpayers, are on the hook,” Elson says.

Taxpayers are also on the hook for billions of dollars worth of bad loans backed by Fannie and Freddie at the height of the housing bubble.

“I would say the most important thing now is to resolve the situation of Fannie and Freddie so there are not more losses,” says Phillip Swagel, a professor of public policy at the University of Maryland.

How to resolve that situation is at the heart of heavy debate among bankers and policy wonks in Washington and beyond.

The Treasury Department is required to come up with a plan for the future of the two firms by the end of this month. But an Obama administration official has confirmed Treasury will miss that deadline.

The official says the administration’s policy is still being worked out, but the plan will call for the government to have a smaller footprint in the housing market, with private capital coming back in and taking a larger share. Copyright 2011 National Public Radio. To see more, visit

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