Fannie & Freddie's Potential Disaster Averted : Alliance Academy

Thursday, July 13, 2006 - Fannie & Freddie's Potential Disaster Averted

Potential disaster averted by regulators on Fannie Mae, Freddie Mac, new agency head says
By MARCY GORDON , Associated Press writer
Date of Publication: July 10, 2006 (Selected Excerpts from the Article)

WASHINGTON — A potential financial disaster that could have shaken the housing market was averted because regulators discovered accounting failures at Fannie Mae and Freddie Mac, the new head of the agency that oversees the mortgage giants said yesterday.

The government-sponsored organizations appear to have gotten the message that they need to reform, but it still will take years to repair their internal problems, James B. Lockhart said in an interview with The Associated Press.

Problems were averted, he said, because the regulators acted to identify and order corrections at Fannie Mae and Freddie Mac, which together stand behind some 40 percent of the $8 trillion U.S. home-mortgage market.

"The good news is that it was caught in time and the remedies are starting to be in place, so that there was no major problem for the average American," Lockhart said. Like the White House and many lawmakers, he believes the mortgage holdings of Fannie Mae and Freddie Mac — totaling more than $1 trillion — should be reduced. He called legislation pending in the Senate "a very good starting point."

Fannie Mae, the second-largest U.S. financial institution after Citigroup Inc. and the second-biggest borrower after the federal government, is restating its earnings back to 2001 — a correction expected to reach at least $11 billion. The company was fined $400 million in a settlement in May with OFHEO and the Securities and Exchange Commission, one of the largest civil penalties ever in an accounting fraud case.

The accounting failures and earnings manipulation at Washington-based Fannie Mae became known in September 2004 after the OFHEO regulators discovered them in a special review. No. 2 rival Freddie Mac had its own accounting crisis in mid-2003, when the company disclosed that it had misstated earnings by some $5 billion — mostly underreported — for 2000-2002 and ousted its top executives. Similarly, it was fined $125 million by OFHEO and ordered to make changes.

OFHEO's review found that current and former executives of Fannie Mae reaped hundreds of millions of dollars in bonuses in a deceptive accounting scheme from 1998 to 2004. Employees are said to have manipulated accounting to hit quarterly earnings targets so senior executives could pocket the bonus money.

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Thursday, July 13, 2006 - Fannie & Freddie's Potential Disaster Averted

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