- The Washington Times - Sunday, July 27, 2003

Freddie Mac’s sheer size, coupled with its implicit guarantee from the government, will likely allow it to weather its accounting imbroglio. But due to the Office of Federal Housing Enterprise Oversight’s (OFHEO) delayed detection of Freddie’s exotic accounting practices, the lawmakers calling for transferring regulation of the company to the Treasury Department are on target. Such a shift would restore investor confidence in government oversight of Freddie Mac, thereby benefiting both the company and millions of homeowners.

Freddie Mac and its close relative Fannie Mae are among the four largest financial institutions in America. The companies buy mortgages from banks and savings and loans. They also repackage some of those mortgages and sell them as securities, known as mortgage-backed securities. These securities are traded on Wall Street and have made the mortgage market very liquid. The two companies own or guarantee 42 percent of the nation’s $7 trillion mortgage market.

They are also hybrid companies. Both are private and publicly traded, but enjoy tax exemptions. They don’t have to comply with some of the disclosure requirements on all other publicly traded companies, and are widely believed to be guaranteed by the government against default. In 1970, Congress gave Freddie Mac its charter, and Fannie Mae completed its transformation from a public entity to a government-sponsored private company. The Treasury Department has the right to purchase up to $2.25 billion in Freddie and Fannie debt.

When Freddie Mac said it would be restating its earnings by as much as $4.5 billion over the past five years, legislators and market players called for a closer look at the operations of the mortgage giants. A report that Freddie Mac released last week on its investigation of accounting issues laid blame on the company’s former chief executive, president and chief financial officer for improper accounting practices. But the report also makes clear that the company’s current chief executive, Greg Parseghian, had broad knowledge of the accounting schemes. The report said the company used swap transactions to defer reporting of $420 million in earnings until some future reporting period in order to compensate for an expected decline in profits and make earnings appear more stable. Freddie Mac is also under investigation by OFHEO, the SEC and a U.S. attorney.

OFHEO has been fairly accused of being slow to bolster its oversight of Freddie Mac. Freddie announced on Jan. 22 it would be restating its earnings for the past three years, and on March 25 that the restatement would reflect greater earnings volatility. OFHEO did not say until June 4 that accounting irregularities and employee misconduct were discovered during a re-audit. The mortgage market that Freddie and Fannie dominate is critical to America’s economic stability. For this very reason, Congress should ensure that any governmental review of their financial health is rigorous and trusted.

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