As The Credit Union Journal went to press on Christmas Eve, the jobs of two top executives at Fannie Mae-CEO Franklin Raines and Chief Financial Officer Timothy Howard-were hanging by a thread.
The board of the secondary mortgage market giant had met several times to discuss the status of the two top executives after the Securities and Exchange Commission laid the blame for the spreading accounting scandal at the company at Raines' and Howard's feet. It appeared that one or both of the two were going to be fired in order to satisfy both regulators and members of Congress, who are poised to consider reform of the secondary market oversight as soon as the 109th Congress convenes.
During October hearings Raines told the House Financial Services Committee that he disagreed with findings by Fannie Mae's chief regulator, the Office of Federal Housing Enterprise Oversight, that they had misapplied two main accounting rules in order to manipulate the company's books, helping qualify top executives for annual bonuses. Raines said they had voluntarily referred OFHEO's findings to the SEC, this country's chief arbitrator on financial statements, and would abide by what the SEC said. Ultimately, he told the lawmakers, he would be accountable for any SEC findings.
Well, the SEC weighed in and corroborated the OFHEO findings. This will likely mean that Fannie will be required to write-down its earnings for the past four years by as much as $9 billion, requiring them to add as much as $5 billion to capital.
Raines' comments came about a year after he assured investors and members of Congress that there were no accounting irregularities at his company, like the ones uncovered at secondary market sister Freddie Mac. In that instance, top Freddie Mac executives were fired after OFHEO found the company had been manipulating its books to "smooth out" earnings in order to meet Wall Street expectations.
Political Ramifications
The accounting scandal, coming on the heels of the Freddie Mac scandal, has huge political ramifications. That's because it gives increasing impetus to reform efforts in Congress. The reform originally started out as a simple proposal to move the chief Fannie and Freddie regulator, OFHEO, from HUD to the Treasury Department, and give it a little more muscle. But both Fannie and Freddie, among the most powerful lobbies in Washington, worked to defeat that modest proposal. That now appears to have been a major political miscalculation, as the spreading Fannie Mae scandal has emboldened opponents of the two government sponsored enterprises to push for more far-reaching reform.
As a result, the reform Congress will begin debating in just a few weeks is expected to delve into a full-privatization of the quasi-governmental agencies that could include the elimination of the line of credit with the Treasury-the so-called implied guarantee of debt for the two mortgage giants, as well the possible elimination of exemptions of certain taxes, and/or a strict limit on the products and services the two could offer customers.
Angering Lawmakers
What is angering lawmakers is the concept that these two companies, chartered by the federal government and imbued with numerous advantages to benefit the nation's homebuyers, are being used by top executives to reap millions of dollars in annual bonuses and other perks. Many argue that these government advantages are no longer necessary and that the government should step aside to let competition take over in the secondary mortgage market. Over the past decade many other options have emerged for institutions to sell their mortgages on the secondary market. Those options, offered by some of the biggest competitors in the mortgage market, are also driving the effort to rein in the two mortgage giants.
The impact on credit unions will be subtle, but profound. Credit unions have increasingly grown to love Fannie and Freddie, for two reasons. The first is the two companies provide a ready outlet for credit unions to sell the increasing amount of home loans they originate. Both Fannie and Freddie have signed deals over the last year with NAFCU and CUNA to insure a constant pipeline of mortgage business. Fannie has gone so far as to develop a 40-year mortgage product especially for credit unions.
Credit Union Investments
But just as importantly are the billions of dollars-maybe as much as $50 billion-of credit union investments in securities issued by one of the two government agencies, among the few permissible investment options for credit unions. The implied government guarantee of agency debt builds in a premium of as much as 40 basis points, reaping millions of dollars in extra income on credit union investments.
These growing ties to credit unions is why the credit union lobby has remained conspicuously absent from the reform debate, even as the issue escalates. Credit union lobbyists have repeatedly said that they are monitoring the situation closely, but have no position on the reform.
For the average American, this issue is as arcane as it can be. Few people even know what Fannie Mae or Freddie Mac are or do. Fewer still even know what the secondary market is. It's not an issue that will resonate like Social Security reform.
Nevertheless, this will be among the first major issues tackled by Congress in the new year.
Ed Roberts can be reached at eroberts
