Discovery of Accounting Errors at Fannie and Freddie Saved the Market

By: Martin Lukac
Submitted: 2007-01-17 16:23:56
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If accounting failures had not been discovered at Fannie Mae and Freddie Mac, the housing market could have faced a potential financial disaster, said the new head of the oversight of the two mortgage giants on Monday.

James B. Lockhart told the Associated Press on Monday that the companies appear to have the idea that reformation is necessary. Yet, he says it will take years to repair the internal problems within Fannie and Freddie.

"The housing market is so important in this country," Lockhart said. "And to have it built on what turned out to be a shaky foundation could have caused significant financial problems."

Lockhart has headed the Office of Federal Oversight for two months.

He says that disaster was averted because regulators identified and ordered corrections at Fannie Mae and Freddie Mac. Together, the companies stand behind 40% of the home-mortgage market -- an $8 trillion industry.

"The good news is that it was caught in time and the remedies are starting to be in place, so that there was no major problem for the average American," Lockhart said.

Lockhart sides with the White House and many lawmakers when it comes to the two agencies. He believes that the mortgage holdings of Fannie and Freddie, which currently total more than $1 trillion, should be reduced. He points to legislation in the Senate as "a very good starting point."

Fannie Mae is the second-largest U.S. financial institution, after Citigroup, Inc. It is the second-biggest U.S. borrower, after the federal government. It is currently restating its earnings back to 2001. The correction is expected to reach at least $11 billion.

In May, Fannie was fined almost $400 million in a settlement with the OFHEO and the Securities and Exchange Commissions. It has promised a top-to-bottom change in corporate culture, accounting procedures and risk management procedures.

Fannie rival, Freddie Mac, had an accounting crisis in 2003, when it was disclosed that earnings had been misstated by approximately $5 billion for 2002-2003. It was fined $125 million by OFHEO and ordered to make serious changes.

In the case of either company going under, there would be less money for consumers to borrow for mortgage purposes. Interest rates on home loans would go even higher, and standards for approval would probably increase.

Created in the 70's by Congress, the companies buy mortgages from banks and lenders and then bundle the loans into securities, which are sold world-wide.

Martin Lukac represents http://www.RateEmpire.com and http://www.1AmericanFinancial.com, a finance web-company specializing in real estate and mortgage rates. We specialize in daily updates, mortgage news, rate predictions, mortgage rates and more. Find low home loan mortgage interest rates from hundreds of mortgage companies!

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