OFHEO Identifies Corrective Steps for Fannie Mae
In a settlement with the Office of Federal Housing Enterprise Oversight (OFHEO) and the Securities and Exchange Commission (SEC), Fannie Mae has agreed to continue to maintain a previously imposed capital surplus of 30% and limit the size of its portfolio to the $727.2 billion it held at the end of last year. Fannie Mae was also fined $400 million.
Fannie Mae signed the consent order in response to findings by OFHEO — outlined in a 340-page report released on May 23 — that a series of major improprieties in accounting and corporate governance practices at the government sponsored enterprise between 1998 and 2004 led to an overstatement of its earnings by $10.6 billion.
The consent order details steps that Fannie Mae must initiate or continue with respect to corporate governance, its board of directors, internal controls, accounting procedures and systems, personnel, compensation, corporate reporting and regulatory cooperation.
Many of the corrective measures recommended in the OFHEO report have already been met by the new management team that was brought on board after the accounting problems surfaced in 2004 and Fannie Mae announced it would restate its earnings.
The report criticizes Fannie Mae’s board of directors for failing in its duty to oversee the actions of management and raises questions of possible wrong doing by current Fannie Mae executives, but most of the blame for the accounting misdeeds was placed on the previous regime.
Under the consent agreement, Fannie Mae’s board must commission a review of all individuals mentioned in the OFHEO report as possible participants in misconduct in order to determine whether it is appropriate for them to remain in their positions with the company. The board is required to report the results of this personnel review within 150 days.
The 30% surplus and portfolio limitations, similar to those imposed upon Freddie Mac, will remain in place until OFHEO is satisfied that accounting, risk-management and corporate governance problems have been corrected and that adequate risk-management and other measures have been instituted. The consent order sets forth specific conditions for lifting the portfolio limit which, in addition to the above, include capital and market conditions.
The action on portfolios allows Fannie Mae to seek increases in holdings for liquidity, housing goals, portfolio flexibility and competitive considerations.
The View From Capitol Hill
It is unclear what impact, if any, the OFHEO report will have on pending GSE reform legislation.
While pundits on Capitol Hill anticipated that the report would give some impetus to the overly restrictive Senate bill, OFHEO’s findings so far have had little bearing on the underlying political dynamics driving the GSE reform debate.
The House of Representatives passed favorable GSE reform legislation by an overwhelming bipartisan vote of 331 to 90, while the Senate Banking Committee could only pass a reform bill out of committee on a party-line vote. While the OFHEO report hardly sheds a favorable light on the accounting activities of the GSEs, future movement of the reform effort in Congress still hinges on the ability of the Senate to compromise on key legislative provisions.
“H.R. 1461 provides the appropriate regulatory structure that allows the 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 on a safe and sound basis,” said NAHB Executive Vice President & CEO Jerry Howard.
Congressional GSE reform activity is so far limited to a June 6 hearing of the House Financial Services Committee on the OFHEO examination. A similar hearing could also be scheduled that week by the Senate Finance Committee.
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For more information, e-mail Michael Strauss at NAHB, or call him at 800-368-5242 x8252.