The Federal National Mortgage Association has placed all 53 of its debt-selling group members on one-year probation because of sales practice violations, the agency announced yesterday.
A mid-September inquiry into selling practices over the past three years uncovered the violations, according to an agency press release. Fannie Mae discovered that each firm in the selling group participated in at least one act that violated its contractual agreements with the agency.
"We find these violations of the selling group agreement unacceptable," Fannie Mae Chairman James A. Johnson said in a letter sent to the chief executive officer of each firm.
"The widespread nature of the violations requires us to take comprehensive action to restore the integrity of the securities distribution process," he said.
Armed with information furnished by selling group members for the period beginning September 1988, the agency discovered that each member of the debenture selling group had engaged in one or a combination of the following: exaggerating custommer demand during the allotment process; overstating or misstating actual purchases in written reports that followed; and buying debentures for their own accounts without Fannie Mae's permission.
Analyses by Fannie Mae and by an outside firm hired by Fannie Mae revealed no evidence that the practices caused home buyers or Fannie Mae any economic harm. But if subsequent evidence determines the practices were harmful, the agency will seek compensation for any losses, Mr. Johnson wrote.
To prevent further transgressions, Fannie Mae has unveiled sweeping revisions to its procedures for bond sales as defined by its selling group agreement.
"The new selling group agreement and guidelines are designed to clarify our mutual obligations, to reflect market dynamics, and to protect the integrity of the process," Mr. Johnson wrote. "The revised agreement emphasizes the need for accurate communication between members and Fannie Mae on clearly specified terms, along with record-keeping requirements and audit program necessary to confirm it."
Mr. Johnson also said any firm violating the new agreement during the probation year will be expelled from all Fannie Mae selling groups in which it participates, including debentures, short-term notes, residential financing securities, and medium-term notes.
To remain in the selling group, each firm must also notify all customers to whom it sold Fannie Mae debt securities between September 1988 and September 1991 that Fannie Mae has placed it on probation for violating the old agreement.
To bolster accountability, Fannie Mae's revised agreement mandates that each firm's chief executive officer acknowledge acceptance of the new agreement's terms. The agency requires that each chief executive officer certify annually that he understands his firm's obligations. He must also certify that he will safeguard the integrity of the sales process and that the firm's compliance program will check for adherence to the agreement's obligations.
The new agreement requires each firm to take steps to ensure compliance, like training bond traders and placing a senior officer in charge of making sure the firms meets the new obligations.
In secondary-market trading, high-yield bonds were unchanged to up 1/4 point in light activity, traders said. High-grade bonds were unchanged in what one trader called "nonexistent" trading.
Rating Agency News
Standard & Poor's Corp. yesterday downgraded J Sainsbury PLC's senior long-term debt to AA-minus, from AA, and its subordinated debt to A-plus, from AA-minus. It affirmed the A-1 plus rating on the group's sterling commercial paper program. About $1 billion of debt is affected.
The downgrade comes after the rating agency's review of the United Kingdom's retail sector and the operational and financial profiles of rated companies in the industry.
"Sainsbury's remains the clear market leader among the U.K.'s food retailers," a Standard & Poor's release said. "However, competition is intensifying at a time when future trends in consumer expenditure are uncertain, and it is likely that these changes in the trading environment will both restrict the scope of further margin improvements and slow the rate of profits growth."
Moody's Investors Service confirmed Greyhoud Financial Corp's long-term senior debt rating at Baa2 and confirmed the rating for the company's short-term commercial paper at Prime-2.
Moody's confirmed Greyhound's subordinated debt rating at Ba1.
In addition, Moody's confirmed the claims-paying rating of Verex, the mortgage insurance unit, at Baa3. Moody's placed the ratings under review, direction uncertain, on Oct. 29, 1991.