Magazine article Mortgage Banking

OFHEO Report Critical of Fannie Mae; GSE Fined $400 Million

Magazine article Mortgage Banking

OFHEO Report Critical of Fannie Mae; GSE Fined $400 Million

Article excerpt

Fannie Mae received a one-two punch by federal regulators following the release of a long-awaited report on past years' conduct at the company detailing Fannie's "arrogant and unethical corporate culture," as well as the announcement of a $400 million penalty levied against the government-sponsored enterprise.

More than two years in the making, the report by the Office of Federal Housing Enterprise Oversight was scathing in its description of Fannie Mae as an "end-justifies-the-means" environment where employees manipulated accounting and earnings to trigger bonuses for senior executives from 1998 to 2004. Fannie Mae co-opted its internal auditors and "stonewalled" regulators, including OFHEO, according to James B. Lockhart, OFHEO's acting director.

"Fannie Mae's executives were precisely managing earnings to the one-hundredth of a penny to maximize their bonuses while neglecting investments in systems' internal controls and risk management," Lockhart said. "The combination of earnings manipulation, mismanagement and unconstrained growth resulted in an estimated $10.6 billion of losses, well over a billion dollars in expenses to fix the problems, and ill-gotten bonuses in the hundreds of millions of dollars," OFHEO claims.

Among the report's key findings:

* A large number of Fannie Mae's accounting policies and practices did not comply with Generally Accepted Accounting Principles (GAAP). Fannie also had serious problems with internal control, financial reporting and corporate governance.

* Senior management did not make investments in accounting systems, computer systems, other infrastructure and staffing needed to support a sound internal control system, proper accounting and GAAP-consistent financial reporting. Those failures came at a time when Fannie Mae faced many operational challenges related to its rapid growth and changing accounting and legal requirements.

* Fannie's senior management sought to interfere with OFHEO's special examination by directing the government-sponsored enterprise's (GSE's) lobbyists to use their ties to congressional staff to improperly generate a congressional request for the Inspector General of the Department of Housing and Urban Development (HUD) to investigate OFHEO's conduct of that examination and to insert into an appropriations bill language that would punish the agency by reducing its appropriations until the director of OFHEO was replaced.

As part of a settlement agreement between OFHEO and the Securities and Exchange Commission, Fannie Mae agreed to pay a $400 million penalty--$50 million to OFHEO and $350 million to the SEC. …

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