The secondary mortgage markets, the underpinnings of the nation's housing finance, were roiled again last week when the board of Fannie Mae fired the company's Chief Executive Franklin Raines and Chief Financial Officer Timothy Howard over the growing accounting scandal at the company.
Raines, a well-known political figure as former head of the Clinton White House budget office, as well as a leading figure on Wall Street, agreed to take early retirement because of the growing scandal.
The firings came less than a week after the Securities and Exchange Commission ruled that the nation's second largest financial institution, holding more than $1-trillion of the nation's home mortgages, violated rules for accounting for its financial derivatives, held to hedge its huge mortgage portfolio.
The SEC ruling supported October's findings by Fannie's chief regulator, the Office of Federal Housing Enterprise Oversight, which concluded the company intentionally manipulated its finances in order to qualify Raines, Howard and other executives for millions of dollars in bonuses.
The Fannie Mae firings also came a year after top executives at Fannie's sister secondary mortgage giant, Freddie Mac, were forced out over similar accounting improprieties in which regulators determined Freddie Mac had manipulated its books for at least five years to satisfy Wall Street expectations and to qualify top executives for hefty annual bonuses.
During congressional hearings in October Raines told lawmakers the company disagreed with OFHEO's findings but would abide by what the SEC found. Raines referred to that pledge after last week's firings. "I previously stated that I would hold myself accountable if the SEC determined that significant mistakes were made in the company's accounting. Although, to my knowledge, the company has always made good faith efforts to get its accounting right, the SEC has determined that mistakes were made. By my early retirement, I have held myself accountable," Raines said in a statement.
The Fannie Mae scandal is expected to speed legislative reforms that were fought by both secondary mortgage companies, observers said. Gary Kohn, a CUNA lobbyist, said he expected Democratic lawmakers, some who had vociferously defended Fannie Mae at the October hearing, to be more cooperative as a result of the Fannie Mae scandal.
Following the scandal at Freddie Mac there was considerable momentum for a proposal to beef up the Fannie and Freddie regulator, known as OFHEO, and move it from the Department of Housing and Urban Development (HUD) to the Treasury Department. But that momentum dissipated and opposition by the two mortgage giants, among the most powerful lobbies on Capitol Hill, forced the proposal to die off.
Now there are expectations that Congress will move quickly on a more comprehensive reform package, one that will also include the Federal Home Loan Banks, and address certain other issues like capital levels and the authority of the three GSEs to offer new products and services. Kohn said CUNA would be concerned if a new regulator under the Treasury is given authority over approval of new products and services offered by Fannie or Freddie because the regulator could be subject to pressure by the powerful banking lobby.
The heightened focus on the reform effort by the banking committees in the House and Senate will push aside the credit union agenda, including the push for regulatory relief, said John McKechnie, chief lobbyist for CUNA. "This is going to crowd a lot of other things off the agenda for the first couple of months," said McKechnie.
Fred Becker, president of NAFCU, noted the critical role both Fannie Mae and Freddie Mac play in the credit union industry, which sells as much as a third of its mortgages to one of the two companies. NAFCU has a partnership with Fannie Mae to give credit unions a discount on the secondary market process, while CUNA has a similar partnership with Freddie Mac.
"NAFCU's interest is simple, and credit unions' interest is simple, and that is to ensure that we continue to have a viable source, or sources, to securitize your (credit unions') mortgages and get them off your books," said Becker. The partnership with Fannie Mae, said Becker, has enabled three-fourths of NAFCU's 1,000 members to get better pricing on the mortgages they sell.
The Fannie Mae issue could have broader ramifications because he OFHEO said the lapses in accounting will require Fannie to write-down its net income over the past three years by more than $9 billion, which will require the company to raise billions more of new capital.
According to Jonathan Lindley, a long-time credit union and savings and loan lobbyist, Fannie will probably raise the new capital by selling off some of its huge mortgage holdings, meaning it will probably be buying fewer mortgages from credit unions and banks in the short-term.
