- The Washington Times - Tuesday, December 21, 2004

If the end of the election season and the coming New Year didn’t provide lawmakers with fresh impetus to consider new regulations for mortgage giants Freddie Mac and Fannie Mae, then the SEC report on Fannie Mae’s accounting practices certainly should. Given the overall importance of both companies to the U.S. economy, the findings by the Security and Exchange Commission are indeed worrisome. Still, Congress should be restrained in its review of the two housing lenders, and resist the attempts by some to strangle the companies with excessive regulation.

Last week, the SEC said that the agency’s review of earnings from 2001 to mid-2004 found that “Fannie Mae’s accounting practices did not comply in material respects with the accounting requirements.” The SEC “advised” the company to restate its financial statements filed with SEC to eliminate the use of so-called hedge accounting. Such a move will force Fannie to restate earnings by about $9 billion, which will eliminate more than one-third of its profits over the past 3 1/2 years.

The SEC report follows similar accounting problems at Freddie Mac, which, like Fannie, is a private company chartered by Congress to promote liquidity in the mortgage-market and therefore make home ownership less expensive. Fannie Mae and Freddie Mac own or guarantee almost half the $7.6 trillion mortgage market. Fannie is the second-largest debtor in the U.S. behind the government. Given the size of Fannie’s and Freddie’s liabilities and assets, any problems at either company sends tremors through the financial system.

The tremors could also be going through Congress, if further accounting or other problems are discovered. The Justice Department is also investigating Fannie, and a more formal investigation at the SEC is ongoing. The SEC advisory report follows a scathing review of Fannie’s books by its regulator, the Office of Federal Housing Enterprise Oversight (OFHEO), in September. The OFHEO report said that Fannie’s wrongful accounting on its derivatives portfolio “appear to be pervasive and reinforced by management whose objective is to reduce earnings volatility at significant cost to employee and management integrity.” It also said Fannie Mae had failed to deduct $200 million of estimated expenses against earnings in 1998, a move which enabled the top six company executives to receive $5.9 million in bonuses.

Afterward, Fannie Mae Chairman and CEO Franklin Raines asked the SEC to review Fannie’s books and reach a conclusion. If “after a thorough review of all the facts it is determined that our company made significant mistakes, our board and our shareholders will hold me accountable and I’ll hold myself accountable,” Mr. Raines told Congress — words that could come to resonate in coming weeks.

Some in Congress are trying to use the missteps of management to reverse the companies’ government charters. Such a move, however, would have consequences not only on mortgage financing, but the economy as a whole.

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