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Apr-18-2008Ex-Fannie Mae Executives Said to Be Near Settlement(topic overview)
CONTENTS:
- NEW YORK (Thomson Financial) - Government-sponsored enterprises Fannie Mae and Freddie Mac have made progress in improving their operations and bolstering mortgage markets, but they remain 'a significant supervisory concern' because of escalating credit risk, the Office of Federal Housing Enterprise Oversight, or OFHEO, said in its annual report to Congress Tuesday. (More...)
- Last November, Freddie Macs former chief executive, Leland Brendsel, agreed in a settlement with OFHEO to pay $2.5 million (1.6 million) in fines to the government, give back $10.5 million (6.6 million) in salary and bonuses to the company, and waive claims against the company for compensation worth $3.4 million (2.14 million). (More...)
- Freddie Mac still has some ineffective internal controls, has invested in poorly underwritten loans and lacks "sufficient executive management depth," the regulator said in an annual report to Congress. (More...)
- "The extraordinary declines in the housing and mortgage markets have greatly increased their credit and interest rate risks," OFHEO director James Lockhart said in a letter to lawmakers. (More...)
- Raines and Howard were swept out of office in December 2004 in the multibillion-dollar accounting fiasco at Washington-based Fannie Mae, the largest U.S. financer and guarantor of home mortgages. (More...)
- OFHEO noted Fannie and Freddie's total exposure to the mortgage market grew by 15 pct in 2007, up from 8 pct in 2006. (More...)
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NEW YORK (Thomson Financial) - Government-sponsored enterprises Fannie Mae and Freddie Mac have made progress in improving their operations and bolstering mortgage markets, but they remain 'a significant supervisory concern' because of escalating credit risk, the Office of Federal Housing Enterprise Oversight, or OFHEO, said in its annual report to Congress Tuesday. OFHEO expects Fannie Mae (nyse: FNM - news - people )'s and Freddie Mac (nyse: FRE - news - people )'s major internal control issues to be remediated in 2008, but warned that 'the challenges of 2007 are still present this year. In order to mitigate the risk, OFHEO said it will need to raise additional capital, pointing to its decision in March to lower the 30% capital requirement to 20%. It also called for a stronger regulator, to ensure ability to restore confidence to the mortgage market. 'Significant progress was made in the remediation process, but OFHEO concludes that both companies remain classified as significant supervisory concerns,' OFHEO director James Lockhart wrote in the report. 'The extraordinary declines in the housing and mortgage markets have greatly increased their credit and interest rate risks, which have put additional pressure on their credit management, interest-rate risk management and financial modeling processes,' he added. [1] WASHINGTON (Thomson Financial) - The federal regulator of mortgage giants Fannie Mae and Freddie Mac said while the two companies have made strides in getting their financial reporting in order, they still need to be closely supervised in light of the risk they face given their exposure to trillions of dollars of mortgages. The Office of Federal Housing Enterprise Oversight (OFHEO) said both companies remain'significant supervisory concerns' in its annual report to Congress that was released on Tuesday. OFHEO has made that judgment in the past in light of the accounting overhaul that both companies needed to undertake. While that process is nearly complete, OFHEO said close supervision is still needed because the 'extraordinary declines in the housing and mortgage markets have greatly increased their credit and interest rate risks'. These risks have put 'additional pressure on their credit management, interest-rate risk management and financial modeling processes', OFHEO said in its report.[2]
WASHINGTON (Reuters) - The unsettled U.S. mortgage and housing markets have left Fannie Mae (FNM.N: Quote, Profile, Research ) and Freddie Mac (FRE.N: Quote, Profile, Research ) exposed to serious risks, their federal regulator said on Tuesday. The two, the top U.S. housing finance companies, are under stress as they walk a line between curbing record losses and increasing their role in stabilizing the ailing U.S. housing market. As they try to boost the mortgage market, "both companies remain classified as significant supervisory concerns," the Office of Federal Housing Enterprise Oversight said in its annual report to Congress. "The extraordinary declines in the housing and mortgage markets have greatly increased their credit and interest rate risks," OFHEO director James Lockhart said in a letter to lawmakers.[3] The Office of Federal Housing Enterprise Oversight has told Congress that Fannie Mae and Freddie Mac remain a significant supervisory concern because of increased mortgage market and credit risks. In its annual report to Congress, the OFHEO, which oversees both mortgage lenders, repeated its support for legislation that would mandate stronger regulation of Fannie Mae and Freddie Mac, but also praised the two for progress they have made. "Fannie Mae and Freddie Mac should be commended for the timely filing of their 2007 annual statements," OFHEO director James Lockhart said in a statement. "While they have made progress in fixing many of their systems, internal controls and risk management problems, they still have much work to do, especially with the continuing challenges of today's mortgage market."[4]
Fannie Mae and Freddie Mac helped provide stability and liquidity to the ailing U.S. mortgage market last year, but the two mortgage-finance giants remain a "significant supervisory concern," their regulator said. In its annual report to Congress on the two shareholder-owned but government-chartered companies, the Office of Federal Housing Enterprise Oversight cited "matters requiring attention," including Freddie Mac's internal controls and corporate governance.[5]
The director of the Office of Federal Housing Enterprise Oversight (OFHEO) released OFHEO's 2008 Report to Congress this morning, which praises the GSEs for improving operational efficiency, but expresses some concern when it comes to the GSEs' ability to stabilize the mortgage marketplace. "These challenges and the pressures on Fannie Mae and Freddie Mac to do even more to support the mortgage market require a stronger regulator," said OFHEO Director James Lockhart. "As I noted in my transmittal letter, last month both GSEs agreed that a 'world-class regulatory structure' is needed and they renewed a shared commitment to work for comprehensive GSE reform legislation.[6]
NEW YORK, April 17 (Reuters) - U.S. federal regulators will announce a settlement on Friday with former Fannie Mae (FNM.N: Quote, Profile, Research ) executives over their alleged roles in a 2004 multibillion-dollar accounting scandal, a person familiar with the settlement said on Thursday. The settlement will conclude two years of litigation brought by Fannie's regulator, the Office of Federal Housing Enterprise Oversight, or OFHEO, against the mortgage company's former chief executive Franklin Raines, and its former chief financial officer Timothy Howard, this person said.[7] A federal regulator was preparing to announce a settlement today with former Fannie Mae chairman and chief executive Franklin D. Raines and two other former executives over administrative charges stemming from the company's misstatement of earnings, according to people familiar with the matter. The Office of Federal Housing Enterprise Oversight sued the former executives in 2006, seeking to recoup more than $115 million of compensation the agency said they received while Fannie Mae's earnings were misstated, plus penalties that could have exceeded $100 million.[8]
The terms of the settlement were not revealed. In 2006 Fannie's regulator, the Office of Federal Housing Enterprise Oversight, or OFHEO, filed civil suits against the three former executives seeking millions of dollars in back pay and bonuses from their time at the company during the accounting problems.[7]
Freddie Mac still has some ineffective internal controls, has invested in poorly underwritten loans and lacks "sufficient executive management depth," the Office of Federal Housing Enterprise Oversight said in an annual report to Congress. The regulator also raised questions about accounting decisions Freddie Mac made last year, saying they need further review. Those issues include Freddie Mac's approach to calculating the amount of money it should hold in reserve and other accounting choices that enabled the company to report a one-time gain of about $1 billion.[9] The findings in the Office of Federal Housing Enterprise Oversight'''s annual report to Congress represent an obstacle to plans to grant Fannie and Freddie greater flexibility to support the U.S. housing market. Ofheo wants Fannie and Freddie to make improvements before it will further reduce a regulatory capital surcharge imposed on them after past accounting scandals. The charge was cut from 30% to 20% this year.[10]
The Office of Federal Housing Enterprise Oversight said it has "significant supervisory concerns" about Fannie Mae and Freddie Mac. While both mortgage finance companies have been hurt by the problems in the housing market, Freddie's problems run deeper, OFHEO said.[11] Raines, former chief financial officer Timothy Howard and former controller Leanne Spencer reached the agreement with the Office of Federal Housing Enterprise Oversight, the agency that oversees the two big government-sponsored mortgage finance companies, Fannie Mae and Freddie Mac.[12]
There seems to be no limit to the ignorance of some investors. Even though a collapsing housing market, the prospect of a nasty, consumer-led recession, and razor-thin capital cushions make it clear that the outlook for the country's largest mortgage lenders is dicey at best, investors have decided they know better and have been bottom-fishing in the shares of Fannie Mae and Freddie Mac. Foreign investors, who are often clueless about such risks until they are suddenly blindsided with the bad news they should have been expecting, have been piling into the debt of these two government-sponsored enterprises. The unsettled U.S. mortgage and housing markets have left Fannie Mae and Freddie Mac exposed to serious risks, their federal regulator said on Tuesday. The two, the top U.S. housing finance companies, are under stress as they walk a line between curbing record losses and increasing their role in stabilizing the ailing U.S. housing market.[13] Despite the turmoil, OFHEO concludes that the two government-sponsored enterprises have done good work to buttress internal controls and prepare themselves for the rocky market. The report "was more upbeat, as the GSEs have remedied nearly all of their accounting and control issues, and are both issuing financial statements on a timely basis," wrote Credit Suisse analyst Moshe Orenbuch in a research note. "However, OFHEO noted that each remains a significant supervisory concern, as a result of their poor performance and increased credit and other risks in the environment," he added. Credit Suisse maintained its "underperform" ratings on the companies. Fannie Mae and Freddie Mac "need to raise additional capital" in order to protect themselves against losses even though they have recently won some relief to expand their mortgage investments, OFHEO said.[13] The deferred losses involve what the companies regard as temporary declines in the value of mortgage-related investments, but determining whether the losses are permanent and therefore must be counted against earnings is a judgment call, OFHEO said. "This is raising a yellow flag," Lockhart said. "Obviously, if we had a major issue with any of these they would have made a change," he said. The regulator's assessment came several years after twin accounting scandals prompted Fannie Mae and Freddie Mac to replace their top managers and begin overhauling the systems they use to track finances. The government has been counting on Fannie Mae and Freddie Mac to help prop up the troubled mortgage market, and toward that end OFHEO last month agreed to let them operate with thinner financial cushions. In announcing the decision, OFHEO emphasized the progress both companies had made in recovering from the accounting scandals.[9] Under an accounting rule, Freddie Mac was able to book income from changes in the value of securities it held and was able to choose which securities to use that way, presenting the opportunity to cherry-pick. In an interview, OFHEO Director James B. Lockhart III said the agency was not challenging the accounting judgments Freddie Mac has already made but will be monitoring its approach going forward "to make sure there's a logical and ongoing methodology." The Securities and Exchange Commission may look at the accounting issues as Freddie Mac seeks to register with the SEC this year, Lockhart said. At the end of last year, Fannie Mae and Freddie Mac had $4.8 billion and $15 billion of paper losses, respectively, that they had not counted against earnings, OFHEO said.[9]
In terms of mortgage origination, Fannie and Freddie accounted for a whopping 75.6 pct in 2007, up sharply from 37.4 pct in 2006. OFHEO director James Lockhart said there is 'increasing pressure' on both companies to 'do even more to support the mortgage market'. He also said this is 'problematic' given the absence of legislation that would strengthen federal oversight of the two companies. Lockhart noted in March OFHEO agreed to lower the capital reserve requirements for both companies in an effort to increase their ability to support the mortgage market, and said the mortgage portfolio of both companies will likely expand later this year. He again stressed better oversight is needed and called on Congress to approve legislation that would give the federal regulator greater oversight over the two companies, as well as other changes OFHEO believes would strengthen its role in overseeing Fannie and Freddie. 'The time to act on the legislation is now,' he said.[2] 'While they have made progress in fixing many of their systems, internal controls and risk management problems, they still have much work to do, especially with the continuing challenges of today's mortgage market,' OFHEO Director James Lockhart said. The report also noted an ongoing "significant supervisory concern" given the current volatility and uncertainty surrounding the U.S. mortgage market and renewed its calls for a stronger regulator of the system.[14] Fannie Mae and Freddie Mac, the U.S. government sponsored housing financiers, 'remain a significant supervisory concern' and still needed better internal controls, corporate governance and risk management, their regulator said yesterday.[10] A federal regulator said yesterday that it has "significant supervisory concerns" about the conditions of Fannie Mae and Freddie Mac, two government-sponsored housing finance companies that own or guarantee trillions of dollars of mortgages. Both companies have suffered financially from the meltdown in the housing market and remain vulnerable to further declines, but Freddie Mac's problems run deeper, the regulator said.[9] Lockhart's report praises Fannie Mae and Freddie Mac for providing liquidity at a time when the mortgage marketplace was in need, but added that the companies remain a "significant supervisory concern." In his report, Lockhart concluded that, "Fannie Mae and Freddie Mac should be commended for the timely filing of their 2007 annual statements.[6]
Raines's lawyer, Kevin M. Downey, has alleged that Lockhart was using the case to advance the argument that Congress should give regulators more power over Fannie Mae and its rival Freddie Mac of McLean.[8]
District-based Fannie Mae reached a settlement with regulators in 2006, agreeing to pay $400 million. Announcing the administrative charges in December 2006, OFHEO Director James B. Lockhart III said the former executives "improperly manipulated earnings to maximize their bonuses. misleading the regulator and the public." These charges cover 1998 to 2004.[8] Though the agency contended that Brendsel could have been held responsible for more than $1 billion of damages and fines, it settled with Brendsel last fall for $16.4 million. That settlement came weeks into an administrative trial before the same judge who was slated to hear the former Fannie Mae executives' case, and Brendsel was represented by the same lawyer who has been defending Raines. Brendsel's settlement did not include any admission of wrongdoing, and he continued to deny OFHEO's charges.[8]
Fannie Mae paid a record $400 million (252 million) civil fine in a settlement with OFHEO and the Securities and Exchange Commission. It also agreed to make top-to-bottom changes in its corporate culture, accounting procedures and ways of managing risk.[12] Raines, who headed the Office of Management and Budget in the Clinton administration, left Fannie Mae in 2004 after the Securities and Exchange Commission determined that it had used improper accounting. The federally chartered mortgage-funding company later corrected its books, wiping out $6.3 billion of previously reported profit.[8] Two years later, the company announced a restatement for 2001 through June 30, 2004, that erased $6.3 billion (4 billion) in previously reported profit. Raines, a prominent Washington figure who was White House budget director in the Clinton administration, led Fannie Mae with its legendary political clout, generosity in campaign contributions and lobbying savvy from 1999 until his ouster by the company board.[12]
Federal regulators are expected to announce Friday a legal settlement with three former senior executives of Fannie Mae over their alleged roles in an accounting scandal that erupted at the mortgage company in 2004, according to people familiar with the situation.[15] U.S. federal regulators will announce a settlement on Friday with former Fannie Mae'' executives over their alleged roles in a 2004 multibillion-dollar accounting scandal, a person familiar with the settlement said on Thursday.[16]
Last November, Freddie Macs former chief executive, Leland Brendsel, agreed in a settlement with OFHEO to pay $2.5 million (1.6 million) in fines to the government, give back $10.5 million (6.6 million) in salary and bonuses to the company, and waive claims against the company for compensation worth $3.4 million (2.14 million). Freddie Macs accounting scandal occurred in June 2003 when the McLean, Virginia-based company said it had misstated earnings by $5 billion (3.15 billion) between 2000 and 2002 artificially inflating results in some periods, while reducing them in others. [12] OFHEO brought administrative charges against former Freddie Mac chairman and chief executive Leland C. Brendsel in connection with a separate accounting scandal.[8]
Freddie Mac still has some ineffective internal controls, has invested in poorly underwritten loans and lacks "sufficient executive management depth," the regulator said in an annual report to Congress. [11] In the report released yesterday, OFHEO gave Fannie Mae more credit than Freddie Mac.[9] Washington, D.C. -based Fannie Mae and McLean, Va. -based Freddie Mac have been under scrutiny since admitting to billions of dollars in accounting errors several years ago.[4] Shares of Fannie Mae fell 14 cents to $25.18, while Freddie Mac rose 1.7% to $23.49.[1]
The companies in the fourth quarter raised $14 billion in capital with sales of preferred stock, but much of that was eroded by $6.1 billion in combined losses for the period. Fannie and Freddie have for years been under tight oversight and rules limiting their growth. In March, the companies were permitted to expand their mortgage investments and OFHEO said it expects to allow them to increase holdings further this year.[13] Capital has become the main focal point for the GSEs, which must walk a line between pleasing lawmakers and regulators with mortgage purchases and protecting shareholders from dilution of stock and credit losses.[13]
"The extraordinary declines in the housing and mortgage markets have greatly increased their credit and interest rate risks," OFHEO director James Lockhart said in a letter to lawmakers. [13] The executives disputed the regulators charges and said they were politically motivated. Raines attorney called OFHEO Director James B. Lockhart "a fatally biased regulator" and asked a federal appeals court to remove him from the case.[12]
OFHEO filed civil charges against Raines, Howard and Spencer in December 2006, seeking fines of $100 million (63 million) or more against the three.[12] Raines total compensation from 1998 through 2004 was $91.1 million (57.4 million), including some $52.6 million (33.14 million) in bonuses, according to OFHEO. Howard earned $30.8 million (19.41 million) during the period, including $16.8 million (10.58 million) in bonuses; Spencer received $7.3 million (4.6 million), of which some $3.5 million (2.21 million).[12]
Raines and Howard were swept out of office in December 2004 in the multibillion-dollar accounting fiasco at Washington-based Fannie Mae, the largest U.S. financer and guarantor of home mortgages. [12] Fannie Mae's internal controls range "from satisfactory to adequate," the regulator said.[9] Ofheo also pointed to Fannie Mae's strategy for managing interest-rate risk, which it described as "somewhat aggressive in light of higher and.[5] In the absence of a settlement in the case of former Fannie Mae executives, an administrative law judge would have presided over a trial-like hearing and issued an opinion.[8]
OFHEO noted Fannie and Freddie's total exposure to the mortgage market grew by 15 pct in 2007, up from 8 pct in 2006. Together, they have a total of 5 trln dollars worth of mortgage-backed securities and mortgage investments. [2] Freddie Mac (NYSE: FRE) had a $2.45 billion loss in the fourth quarter.[4]
SOURCES
1. OFHEO:Fannie Mae, Freddie Mac a'significant supervisory concern' on credit risk - Forbes.com
2. OFHEO says Fannie, Freddie remain'significant supervisory concerns' - Forbes.com
3. Fannie, Freddie regulator sees more risk ahead | Reuters
4. Regulator: Fannie Mae, Freddie Mac still a concern - South Florida Business Journal:
5. Free Preview - WSJ.com
6. DSNews.Com Default Servicing In Print and Online - Formerly REO Magazine
7. UPDATE 1-US regulators to settle with ex-Fannie execs-source | Markets | Markets News | Reuters
8. OFHEO Plans Settlement With Raines - washingtonpost.com
9. Attempting to Heal a Fractured Mortgage Market - washingtonpost.com
10. Concern over US mortgage providers - Property Week
11. Early Briefing: Concerns About Freddie - WashBiz Blog
12. Regulators expected to announce settlement with former Fannie top executives - International Herald Tribune
13. ForexHound.com trading news from the FX world
14. Canadian Economic Press - Welcome
15. Free Preview - WSJ.com
16. US Regulators to Settle with Ex-Fannie Executives - Law and Regulation * US * News * Story - MSNBC.com
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