Fannie Mae Investigation Targets Top Execs

An extensive investigation of Fannie Mae has been going on for close to a year and a half. As it reaches its conclusion, results point to its former finance chief and controller as mainly responsible for the accounting failures at the mortgage giant now struggling to emerge from an $11 billion scandal.

The report was led Senator Warren Rudman. It also found that former chairman and CEO Franklin Raines, while not sharing direct responsibility, contributed to a culture of arrogance at the government-sponsored company. The findings arrive about 17 months after the revelation that federal regulators had discovered violations of accounting rules and earnings manipulations.

The board of Fannie Mae, which finances one of every five home loans in the United States, hired Rudman, a former member of the Senate from New Hampshire, as independent counsel to launch an investigation at the time of the stunning disclosures in September 2004.

Problems at the top of Fannie Mae

Fannie Mae executives - especially former CFO Timothy Howard - gave the board incomplete and sometimes misleading information regarding the company’s accounting and finances, the report found. Howard and Raines were ousted by the board in December 2004.

The report also concluded that Howard and former controller Leanne Spencer, who resigned last year, “were primarily responsible” for the flawed accounting practices in their overzealous drive to have the company show smooth earnings growth and meet Wall Street analysts’ expectations.

As for Raines, who was one of the most influential and politically savvy figures in Washington, the Rudman investigation did not find that he knew that Fannie Mae’s accounting practices violated rules.

“We did find, however, that Raines contributed to a culture that improperly stressed stable earnings growth and that … he was ultimately responsible for the failures that occurred on his watch,” the report says.

Response to Fannie Mae practices

The Bush administration, which has been critical of Fannie Mae and Freddie Mac, its smaller rival in the $8 trillion mortgage market, quickly cited the report’s findings as buttressing its view that Congress should reduce their huge mortgage portfolios.

“The Rudman report lays bare the earnings-at-any-cost culture that had developed over many years at Fannie Mae and the substantial abuses that resulted,” Treasury Undersecretary Randy Quarles said in a statement. “A principal vehicle for generating these earnings was the enormous growth in the portfolio of retained mortgages, and that remains the principal legacy of this decade of abuse.”

The long-awaited report terms Fannie Mae’s accounting systems “grossly inadequate.” It runs more than 600 pages, based on a review of millions of documents by Rudman’s team of investigators and auditors drawn from his law firm, Paul, Weiss, Rifkind, Wharton & Garrison, and from Huron Consulting Group.

Daniel Mudd, Fannie Mae’s chief executive, called the report “strong but good medicine.”

“Fannie Mae is a different company than a year ago,” Mudd said in a statement. “We have been humbled, even embarrassed. But we have begun to make significant changes.”

The findings of the Rudman report may provide additional fuel for Congressional bills focusing on mortgage fraud, along with inspiring members who want to bring a tighter government hand over Fannie Mae and Freddie Mac, both created by Congress to inject money into the home loan market.

What does this mean for anyone in search of a Florida home loan? As usual, just be careful about who you go into business with. Even government-sponsored companies are provind to be questionable at time.