Fannie Mae execs may be out
WASHINGTON – Federal regulators have raised the possibility of removing the management of mortgage giant Fannie Mae after finding serious accounting problems.
The findings by the Office of Federal Housing Enterprise Oversight warrant “immediate remedial action,” the agency’s director said in a letter to the Fannie Mae directors that was released Thursday.
In addition, “we must consider the accountability of management and whether we have sufficient confidence in management to fully implement these corrective measures and bring about broad cultural and operational changes,” Armando Falcon wrote in the letter dated Monday. “The analysis and findings of this report make it difficult to assert such confidence.”
The OFHEO regulators’ report, released late Wednesday following an eight-month investigation that continues, found pervasive accounting problems the agency says cast doubt on the government-sponsored company’s past earnings reports and even its financial soundness.
The 210-page report also raised the possibility of deliberate accounting maneuvers designed to bring bigger bonuses to executives.
Federal regulators are negotiating an agreement with the Fannie Mae board, which has named a special committee of outside directors to respond to OFHEO’s allegations and the preliminary inquiry by the SEC. Fannie Mae spokeswoman Janice Daue declined comment Thursday.
Fannie Mae is the second-largest U.S. financial institution behind Citigroup Inc., and is the second-biggest seller of securities behind the U.S. Treasury. It uses funds from those sales to buy trillions of dollars in home mortgages from banks and other lenders, which it says provides more liquidity and lower mortgage rates to home buyers.
Fannie Mae could be ordered to decrease its financial leverage by raising fresh capital or buying fewer mortgages – potentially making it harder for some buyers to obtain financing for their home purchases.
Experts said it was difficult to discern at this stage what the impact of Fannie Mae’s situation could be.
Shares in Fannie Mae dropped nearly 7 percent Wednesday on the New York Stock Exchange after the company disclosed what the regulators found and the existence of an inquiry by the Securities and Exchange Commission. The stock dropped another 5 percent Thursday, trading at $67.20, down $3.49.
OFHEO, a little-known federal agency, sprang into prominence in mid-2003 after Freddie Mac, Fannie Mae’s smaller competitor in the home mortgage market, disclosed that it had understated profits by some $4.5 billion for 2000-2002 in an effort to smooth earnings. Fannie Mae’s accounting then came under closer scrutiny, though its leaders insisted that it had no problems of that sort.