Week of February 27, 2006
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Rudman Report Renews Discussion of GSE Reform

Following the release on Feb. 23 of a 2,700-page report on Fannie Mae that could provide some new impetus in Congress for passing reform legislation for the nation’s government sponsored enterprises, NAHB reaffirmed its support for corrective actions that the current management of the institution has taken to rebuild the confidence of policymakers and investors while refocusing the company on its housing mission.

Home builders also reiterated support for H.R. 1461, “The Federal Housing Finance Reform Act of 2005” as the best regulatory reform legislative vehicle to ensure the safety and soundness of the GSEs while still enabling them to provide critical financial support for housing.

Commissioned by the Fannie Mae Board of Directors following the release in September 2004 of a report by the Office of Federal Housing Enterprise Oversight detailing extensive accounting problems at the company, last week’s report presented the findings of a 17-month investigation by former Sen. Warren Rudman and the Paul, Weiss law firm into accounting, structure and governance issues at Fannie Mae. The report was based on the examination of more than 4 million documents and 240 interviews.

“The Rudman report confirms our long-held belief that the current Fannie Mae management team is taking the necessary steps to put the company back on the right course,” said Jerry Howard, NAHB’s executive vice president and CEO. “Specifically, Fannie Mae’s current management and board have taken corrective actions to refocus on the company’s housing mission, rebuild credibility with Washington policymakers and Wall Street investors and change the company’s structure and corporate culture to ensure that the financial problems that Fannie Mae has been wrestling with will not occur again. We have great confidence in (President and CEO) Daniel Mudd and his management team.”

Generally, the report found:

  • Fannie Mae has disclosed the principal problematic accounting issues that are the subject of the report.

  • No member of management who Paul, Weiss found knowingly participated in improper conduct is still employed by Fannie Mae.

  • The suggestions made in the report for changes in corporate governance either have been implemented or are underway at the company.

Specific conclusions on Fannie Mae’s historical accounting practices, internal controls, corporate governance and structure prior to 2005 include:

  • Management’s accounting practices in virtually all of the areas that were reviewed were not consistent with Generally Accepted Accounting Principles (GAAP) and, in many instances, management was aware of the departure from those principles.

  • Except for one instance in connection with the 1998 financial statements, there was no evidence found to support the conclusion that management specifically departed from GAAP in order to maximize executive bonuses. There was, however, extensive evidence that the departures from GAAP were intentional in order to show stable earnings growth, achieve forecasted earnings and avoid income statement volatility.

  • Employees in critical accounting, financial reporting and audit functions at Fannie Mae were either unqualified, did not understand their roles or failed to carry out their responsibilities properly.

  • The information provided by management to the Fannie Mae Board of Directors with respect to accounting, financial reporting and internal audit issues generally was incomplete and misleading at times.

  • Fannie Mae’s accounting system was grossly inadequate.

  • The former chief financial officer, Timothy Howard, and the former controller, Leanne Spencer, were primarily responsible for adopting or implementing accounting practices that departed from GAAP, and they put undue emphasis on avoiding earnings volatility and meeting earnings-per-share targets and growth expectations.

  • The report did not find that former Chairman and CEO Franklin Raines knew that Fannie Mae’s accounting practices departed from GAAP. However, the report did find that he contributed to a culture that improperly stressed stable earnings growth and that, in his leadership position, he was ultimately responsible for the failures that occurred on his watch.

NAHB’s Howard noted that the report’s findings underscore the need to pass H.R. 1461, which was introduced by Reps. Richard Baker (R-La.) and Michael Oxley (R-Ohio) and adopted by the House by a wide margin.

“The Rudman findings do not support taking any draconian action as some policymakers have suggested,” Howard said. “H.R. 1461 provides the appropriate regulatory structure that allows GSEs to fulfill their housing mission and to deliver the necessary credit to the housing market while, at the same time, guaranteeing that the GSEs operate in a safe and sound manner.”

The outlook for further consideration of GSE reform legislation in the Senate remained unclear last week. For its part, the House Financial Service Committee had indicated that hearings would be held with former Sen. Rudman upon completion of the report.

To read the legislation, click here and enter H.R. 1461 in the box at the center of the page.

For more information, e-mail Michael Strauss at NAHB, or call him at 800-368-5242 x8252.

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