"I was the CEO of the company and I accept responsibility for everything that happened on my watch," said Daniel Mudd at a hearing before a congressional investigative panel assigned to probe the origins of the 2007-2009 financial crisis.
With its business in disarray and the US housing market in free-fall, Fannie Mae was seized by the federal government in September 2008 and placed under the control of its regulators, along with its sister firm, Freddie Mac.
The spectacular failures of the two firms - both government-sponsored enterprises (GSEs) created to expand mortgage finance - marked a turning point in their controversial history and in the US housing market.
Congress and the Obama administration, consumed for the past two years with shoring up Wall Street and the banking system, have barely begun to figure out how to fix the GSEs.
The Financial Crisis Inquiry Commission, organized by Congress, has held three days of public hearings, focusing on the 2007-2008 breakdown of the mortgage securitization market that triggered a crisis of confidence paralyzing global banking and tipping the US economy into a deep recession.
The outset of Friday's hearing saw Mudd - ousted from his post when Fannie was taken over - apologize and accept blame, a more frankly remorseful approach than was taken in previous hearings by bankers from bailed-out banking titan Citigroup, who were mostly evasive and defensive.
Mudd said the root cause of the GSEs' problems was their business model. In a historic home price slump, the firms could not maintain their mandated balance between "financial goals" of growth and profitability, and "mission goals" of providing liquidity and housing finance for low-income Americans.
"I sought to balance the fine points of mission and business insofar as I could understand them, with the support of regulators and policy-makers. That was no longer possible by Sept. 6, 2008 and I am sorry for that," he said.
"There have been suggestions that Fannie Mae subordinated its mission to the pursuit of higher profits, but I beg to differ," he said, adding that homeownership rates were too high ahead of the financial crisis and the government must now decide what role it wants to play in financing US homes.
James Lockhart, regulator of Fannie and Freddie before the government takeover, said Congress should have acted sooner.
If Congress had not waited until July 2008 to pass legislation aimed at addressing the unexpected mortgage crisis, the fallout would not have been as severe, Lockhart said.
"It is impossible to say whether an earlier passage (of the Housing and Economic Recovery Act) would have prevented the mortgage crisis and the housing bubble, but it certainly would have lessened the damage," he said in prepared testimony.
"It is very possible to say that the companies' opposition to the legislation for so long was a major mistake and extremely costly to their shareholders," Lockhart said.
The Senate is debating legislation aimed at tightening regulation of banks and capital markets. The House of Representatives has already approved a bill along those lines.
Analysts expected Congress to send a final bill to President Barack Obama this year. But it will not include a plan for how to reshape the GSEs - a gaping hole that lawmakers have not yet come to grips with.
House Financial Services Committee Chairman Barney Frank held a hearing last month on the issue and will hold another one on Wednesday. Many more hearings and debate lie ahead.
