- The Washington Times - Tuesday, June 6, 2006


Fannie Mae’s regulator yesterday faulted the directors of the biggest U.S. mortgage finance company for not putting a stop to accounting practices that led to almost $11 billion in errors from 1998 until 2004.

“The board of directors is really the last line of defense in the company and they failed to be sufficiently informed and independent,” James Lockhart, acting director at the Office of Federal Housing Enterprise Oversight (OFHEO), testified to the House Financial Services Committee. “Their oversight failings meant that they did not discover, let alone correct, the redundant variety of unsafe and unsound practices” at the D.C. company.

Among the directors at the time was current Chief Executive Officer Daniel Mudd. Fraudulent bookkeeping by the government-chartered company will cause the company to restate about $10.8 billion of earnings and spend more than $1 billion overhauling its accounting, Mr. Lockhart said, echoing findings of the agency’s investigation detailed in a 340-page report on May 23.

Fannie Mae lost about $30 billion of market value after the OFHEO and the Securities and Exchange Commission in 2004 said executives used improper “cookie jar” reserves and deferred expenses to smooth earnings and reach targets for executive bonuses at the company from 1998 until 2004.

OFHEO and the SEC on May 23 fined Fannie Mae $400 million and limited the more than $700 billion in mortgage assets that are the company’s main profit source. The cap will remain until the company meets unspecified safety and soundness guidelines.

Mr. Lockhart testified that “it is hard to see total removal of limits for several years.”

The period for remediation at Fannie Mae and the smaller Freddie Mac, which disclosed $5 billion in accounting errors in 2003, will exceed two years, Mr. Lockhart told reporters.

“Both firms have unsafe and unsound practices; there is just no doubt about it,” he said after the testimony. “And it will take two plus years” for them to fix their accounting, controls and other operations.

“There is very significant systemic risk here,” he testified, referring to both companies. “It’s not just the assets, it’s the liabilities, the borrowings, the derivatives when you tie them together, and between the three things there is a giant exposure to the world economy.”

Congress is considering creating a tougher regulator for Fannie Mae and Freddie Mac, which together own or guarantee about 40 percent of the $8.5 trillion U.S. residential mortgage market.

“Matters identified for remediation by Fannie Mae should be considered for Freddie Mac,” Mr. Lockhart said.

Freddie Mac, based in McLean, has put a remediation “plan in place, but now it is the time to really implement those plans,” Mr. Lockhart told reporters. “There has been some implementation, obviously they have been doing a lot, but they have a long way to go.”

Credit Suisse earlier yesterday cut the shares of Fannie Mae and Freddie Mac to “neutral” from “outperform” because of growth limits imposed by OFHEO, other “regulatory risk” and “a delayed time frame to return excess capital to shareholders,” analyst Moshe Orenbuch in New York said in a report.

Shares of Fannie Mae fell 94 cents to $49.08 on the New York Stock Exchange. They are down 3.2 percent since the release of the May 23 OFHEO report.

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