Federal regulators said last week they will launch a special audit of Fannie Mae, in light of the accounting scandal engulfing its secondary mortgage market sister Freddie Mac.
Armando Falcon, chief of the Office of Federal Housing Enterprise Oversight, told the Senate Banking Committee he will review whether Fannie Mae is complying with generally accepted accounting principles. Falcon's statement comes after Freddie Mac disclosed that auditing shortfalls led it to underestimate profits on its huge hedging portfolio by as much as $6.5 billion over the last three years.
Falcon made his remarks the day before Fannie reported a 25% fall in net earnings for the first quarter, despite the ongoing mortgage boom. The fall in earnings was due to a massive write-down of $1.9 billion in the market value of Fannie's financial derivatives, held to hedge its huge mortgage portfolio. In a kind of perverse explanation, Fannie said those instruments fell in value because of the continuing fall in interest rates, which have benefited millions of homeowners and Fannie's financial institution clients.
Fannie's financial report, issued in the midst of the greatest mortgage boom ever, underscores the controversy surrounding Freddie Mac, which is still grappling with the accounting for its massive hedging portfolio, held to offset potential swings in interest rates.