Executive Upheaval At Freddie Mac Roils Mortgage Markets

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A boardroom shake-up at Freddie Mac last week that claimed the three top executives at the secondary mortgage market giant shook the financial markets and left Congress struggling to look anew at tightening oversight of the government chartered enterprise.

The announcement that Freddie had fired its president and chief operating officer David Glenn, and forced the departure of long-time chairman and CEO Leland Brendsel, as well as executive vice president Vaughn Clarke amidst a re- audit of the last three years' financial statements, sent the stock of Freddie skidding nearly 16% and created tremors through the bond markets, where Freddie is one of the biggest players.

The boardroom turmoil at the second biggest buyer of home mortgages also brought renewed interest to Capitol Hill where lawmakers immediately plotted hearings to review a number of issues surrounding Freddie Mac and Fannie Mae.

Among the issues to be explored in the coming weeks are the structure of Fannie and Freddie oversight by HUD's Office of Federal Housing Enterprise Oversight, the federally guaranteed line of credit for the two agencies, minimum capital requirements, and accounting practices, according to several Capitol Hill sources.

Rep. Richard Baker (R-LA) chairman of the House Financial Services Subcommittee on Capital Markets, announced hearings into the regulatory oversight of the two government sponsored enterprises. "I fully expect this Congress to exercise their responsibility and take a very, very close look into this," said Baker, a longstanding critic of the two secondary mortgage giants.

John McKechnie, chief lobbyist for CUNA, said the credit union lobby will be fully engaged in any congressional review of the secondary mortgage giants, which buy as much as half the mortgage loans originated by credit unions. "I do know that the waters have been stirred on Capitol Hill," said McKechnie.

The continuing questions about accounting at Freddie Mac are expected to add new impetus to efforts to require greater financial disclosures by the two GSE giants, according to Bill Donovan, chief lobbyist for NAFCU.

"There have been some members of Congress who, for a number of years, felt that the GSEs, Freddie and Fannie, should be subject to greater transparency in their financial filings," said Donovan.

The budding controversy is expected to prompt new calls to require the two companies to file the same quarterly and annual financial reports required of other publicly traded companies, rather than the "SEC-like" disclosures the two currently provide; or to register with the Securities and Exchange Commission and pay registration fees like all other publicly traded entities do on securities they sell.

Fannie and Freddie are the biggest issuers of securities in the country other than the U.S. Treasury.

At a minimum, the controversy is expected to force a reorganization of the 10-year old regulatory oversight scheme for Fannie and Freddie under OFHEA, which is an office of the Department of Housing and Urban Development, or HUD.

"If I had to take a guess," said Jonathan Lindley, lobbyist for NASCUS, and a long-time Fannie and Freddie-watcher, "I'd say OFHEA is gone and it will end up being an office in the Treasury Department. It's kind of a strange duck, anyway."

Last week's boardroom ouster caused an immediate flight to safety among institutional investors, boosting the market for U.S. Treasuries and widening spreads for agency securities, the favored investments for credit unions.

Spreads on some agency issues, which normally trade at 25-to-40 basis points above Treasuries, widened by as much as 8 bps for 10-year issues on the day of the Freddie Mac announcements. Because few questioned the credit risk involved, the phenomenon presented a buying opportunity for some credit unions.

Chris Sullivan, chief investment officer at United Nations Federal Credit Union, said he took advantage of the widening in agency spreads to load up on some Fannie Mae issues.

The continuing disorder at Freddie Mac, he suggested, will not affect their ability to bring debt to the market but could pose a buying opportunity for credit unions "as investors demand more yield" from them.

Mitchell Glass, vice president at Shay Financial, said market disruptions like this one pose opportunities for savvy investors. "If it continues to widen (the spread) then I would take advantage of it," he said.

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