Blistering Report On Fannie Mae Expected To Add Impetus To Bill
A blistering regulatory report released last week finding that top executives at Fannie Mae manipulated the company's finances to qualify them for millions of dollars in bonuses, coupled with a record $400 million fine, is expected to serve as a new impetus for lawmakers to complete legislation overhauling oversight of the huge secondary mortgage market.
Dan Berger, chief lobbyist for NAFCU, said he hopes the scathing report and its aftermath will prompt the Senate to take up the reform bill, which has been sitting on the shelf for months. "We are hoping that it builds momentum for a fair and meaningful bill to pass," said Berger.
But the credit union lobbyist said NAFCU, which has a lucrative endorsement deal with Fannie Mae to buy mortgages from credit unions, opposes the current Senate version of the bill which would require both Fannie Mae and its sister secondary mortgage giant Freddie Mac to sell off major parts of their huge mortgage portfolios, as such a requirement would upend the secondary market.
NAFCU, said Berger, favors a version of the bill passed by the House which would allow a new secondary market regulator to require the two companies to pare their mortgage portfolios, but not require it. "NAFCU believes the regulator should have the power to require sales of their mortgage portfolio, but only in cases where safety and soundness are threatened," said Berger.
The issue is the major impediment to final passage of a reform bill. The Bush Administration and many Republicans believe that the two companies use their massive portfolios-more than $1 trillion for Fannie Mae-to manipulate the market to benefit the company's stockholders, and not homebuyers. But opponents of the measure, including several House leaders, believe a sell-off of such a huge portfolio would cause havoc in the mortgage markets.
The stakes in the debate are huge for credit unions. Both Fannie Mae and Freddie Mac are closely tied to the credit union industry with the two companies buying as much as half of all single-family mortgages made by credit unions. Credit unions also own tens of billions of dollars of debt issued by the two companies.
In addition to NAFCU's endorsement deal with Fannie Mae, CUNA has an endorsement deal with Freddie Mac.
Last week's report, issued by the Office of Federal Housing Enterprise Oversight, found that from 1998 to mid-2004, the smooth growth in profits and precisely-hit earnings targets each quarter reported by Fannie Mae were "illusions" deliberately created by senior management using faulty accounting. The accounting manipulation tied to executives' bonuses occurred from 1998 to 2004, according to the report, a much longer period than was previously known. OFHEO had earlier said that Fannie Mae in 1998 improperly put off accounting for $200 million in expenses to future periods so executives could collect $27 million in bonuses.
As a result of the charges, Fannie Mae agreed with both OFHEO and the Securities and Exchange Commission to pay a record fine of $400 million to settle securities fraud charges.
Fannie Mae, like Freddie Mac, is still struggling to resolve vast accounting errors. In Fannie Mae's case it is still working to resolve as much as $11 billion in accounting flaws and has not issued quarterly financial statements in almost two years.
The reform bills in both the House and Senate would also create a new regulator for both Fannie Mae and Freddie Mac, as well as the Federal Home Loan Banks; set new capital standards, and allow the new regulator to determine which products and services the secondary market players may sell or offer.