Government Intervention Helped Save Freddie Mac, Fannie Mae From Fiscal Disaster
A potential disaster that could have shaken the U.S. housing market was averted when financial regulators discovered accounting failures at Fannie Mae and Freddie Mac.
James B. Lockhart (pictured), head of the Office of Federal Housing Enterprise Oversight (OFHEO), said the government-sponsored organizations appear to have gotten the message that they need to reform, but observed that it still will take years to repair their internal problems.
“The housing market is so important to this country. To have it built on what turned out to be a shaky foundation could have caused significant financial problems,” Lockhart told the Associated Press. “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.”
Problems were averted because the regulators acted to identify and order corrections at Fannie Mae and Freddie Mac, which together back some 40 percent of the $8 trillion U.S. home loan market. After serious accounting problems at Fannie Mae and Freddie Mac became public knowledge, a push by the Bush Administration to tighten the reins gained ground in Congress.
Lockhart was executive director of the Pension Benefit Guaranty Corp., the federal agency that backs private defined-benefit pensions, under the first President Bush. He worked in the private financial sector and was deputy commissioner of Social Security before taking his current job.
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 U.S. Senate a good starting point.
Fannie Mae, the nation’s second-largest financial institution after Citigroup Inc., and the second-biggest borrower after the U.S. government, is in the process of restating earnings back to 2001 — a correction expected to reach at least $11 billion. The company was hit with a $400 million settlement in May with OFHEO and the Securities and Exchange Commission.
It also agreed to make top-to-bottom changes in its corporate culture, accounting procedures and ways of managing risk. The accounting failures and earnings manipulation at Fannie Mae became known in September 2004 after the OFHEO regulators discovered them in a special review. Freddie Mac had its own accounting crisis in mid-2003, when the company disclosed that it had misstated earnings by some $5 billion.
Similarly, Freddie was fined $125 million by OFHEO and ordered to make changes. If either company were to fail, there could be less money for consumers to borrow in order to get a Florida home loan, and interest rates on mortgages would invariably be forced higher.
Congress created both Fannie Mae and Freddie Mac to inject money into the mortgage market. They buy mortgages from banks and other lenders and bundle the loans into securities for sale to investors worldwide.
“The risk has certainly been reduced by the remedial actions that the two management teams have put in place at our direction,” Lockhart said.
OFHEO’s review found current and former executives of Fannie Mae reaping hundreds of millions of dollars in bonuses in deceptive accounting schemes from 1998 -2004. Employees are said to have manipulated accounting to hit quarterly earnings targets so senior executives could pocket the bonus money. Lockhart has promised that he will pursue some executives to recover allegedly tainted bonus money if Fannie Mae fails to do so itself.
