The accounts at Fannie Mae and Freddie Mac were today described as a "house of cards" by a senior US Republican senator just as the first class action was being filed.

Highly-paid top executives of mortgage finance giant Fannie Mae faced a class action accusing them of lying about the finances of the firm as banking experts labelled its accounting as a "house of cards".

As inquests begin into how earlier reviews of Fannie and fellow mortgage financier Freddie Mac showed adequate capital, Senator Richard Shelby, the senior Republican on the Senate banking committee, said the firms had used accounting rules to mask problems.

Treasury Secretary Hank Paulson and regulator James Lockhart realised the true state of their finances only recently, he said.

"Once they got someone looking closely at Fannie and Freddie's books, they realised there just wasn't adequate capital there. They found out they had a house of cards," said Shelby.

Meanwhile, Fannie Mae's former chairman Stephen Ashley, ex-chief executive Daniel Mudd — both thrown out as part of the government rescue — chief financial officer Stephen Swad and chief business officer Robert Levin, were named in the class action in New York.

Plaintiffs are seeking unspecified damages and say the four men were "motivated to misrepresent Fannie Mae's financial condition by their generous compensation packages".

Despite the rescue that saddles US taxpayers with billions of dollars in potential losses, Mudd is still entitled to severance pay of some $9.3million (£5.2million).

According to the class action complaint, Mudd received over $14million in compensation from Fannie Mae in 2006 and over $12million in 2007, Levin received more than $9.5million in 2006 and over $8.4million in 2007 and Swad received at least $4.8million in 2007.