By Marcy Gordon
January 18, 2007
ASSOCIATED PRESS
SourceWASHINGTON – Fannie Mae and Freddie Mac have made progress toward correcting financial weaknesses, but tight government supervision is needed as the mortgage giants emerge from accounting scandals, a federal regulator said Thursday.
James B. Lockhart, director of the Office of Federal Housing Enterprise Oversight, also disclosed that Fannie Mae, which just last month announced a restatement of $6.3 billion in profit for 2001 through mid-2004, had a loss in the third quarter of 2006. He did not specify the amount of the loss.
“They unfortunately have very, very large problems,” Lockhart said in a meeting with reporters, referring to the government-sponsored companies that are the two biggest financiers in the $8 trillion home-mortgage market in the United States. “They have a long way to go; there are still significant worries.”
The problems “are massive and they're ongoing,” he said.
Lockhart noted that the companies' financial results continue to be volatile from quarter to quarter, saying that both lost money in the July-September period last year. Freddie Mac, the smaller of the two, recently forecast a loss of about $550 million for the quarter due mainly to declines in interest rates, compared with a profit of $880 million in the third quarter of 2005.
Fannie Mae has not reported or forecast its results beyond June 2004. The company, which is the second-largest U.S. financial institution after Citigroup Inc., is not expected to return to timely financial reporting until early next year.
Fannie Mae spokesman Brian Faith declined to comment on the third-quarter results.
With the Democrats now in control of Congress, prospects have improved for compromise legislation tightening the government's reins on Fannie Mae and Freddie Mac. The accounting scandals that roiled both companies in recent years brought demands by Republicans in Congress and the Bush administration for cuts in their massive mortgage holdings – a move vehemently opposed by Fannie Mae and Freddie Mac.
Rep. Barney Frank, D-Mass., the new chairman of the House Financial Services Committee, is proposing legislation that wouldn't mandate such reductions but would give the OFHEO director discretion to limit or reduce the holdings.
Fannie Mae and Freddie Mac were created by Congress to pump money into the mortgage market by buying home loans from banks and other lenders, in order to keep interest rates low and make home ownership affordable for low- and moderate-income people. They bundle the mortgages into securities for sale on Wall Street.
Critics of the companies have pointed to the recent accounting breakdowns to bolster their case that the mortgage portfolios – totaling more than $1 trillion – are improperly managed and pose a risk to the financial system.
“We have to prevent these companies from growing out of control again,” Lockhart said Thursday. He said legislation is definitely needed to bolster the supervisory authority and independence of OFHEO.
The agency in 2004 accused Washington-based Fannie Mae of serious accounting problems and earnings manipulation to meet Wall Street targets, and the Securities and Exchange Commission ordered the company to restate earnings back to 2001. Fannie Mae ousted top executives in 2004 and paid a record $400 million civil fine in a settlement with OFHEO and the SEC last May.
McLean, Va.-based Freddie Mac disclosed in June 2003 that it had misstated earnings – mostly underreported – by some $5 billion for 2000-2002 to smooth out volatility in profits and uphold its image on Wall Street as a steady performer.