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Regulator says that Fannie Mae and Freddie Mac are still Concerns

[May 27, 2008.]


A regulator from the OFHEO, or Office of Federal Housing Enterprise Oversight, has spoken to Congress about Fannie Mae and Freddie Mac, two housing finance companies that are government-sponsored, over fears that the businesses remain significant supervisory concerns because of the current economy's heightened mortgage and credit risks.

The two companies, despite their federal backing, have nonetheless endured heavy financial losses from the subprime mortgage meltdown and continue to remain vulnerable to further shrinking revenues. But Freddie Mac has problems that are much deeper than what shows on the surface, said the regulator.

Freddie Mac, formally known as the Federal Home Loan Mortgage Corporation, or FHLMC, is purported to still suffer from ineffective internal management, has make poor investments in shortsighted loans and lacks "sufficient executive management depth", according to the report to Congress made by OFHEO.

Several questions were raised by the regulator concerning the accounting decisions made by Freddie Mac last year, suggesting that they need the quality of their actions to be reviewed. Those issues that are relevant to their performance include Freddie Mac's methodology of calculating the total amount of money it holds in reserve and other choices in accounting that have enabled the company to announce a one-time gain of roughly $1 billion.

Operating under the rules of accounting, Freddie Mac was given the ability to book income from market changes in the value of the securities it held and was able to conveniently select which securities that it could use in the manner, presenting an ideal instance to cherry-pick.

The regulator's evaluation of both companies arrive several years after dual accounting scandals caused both companies to replace their top level management and begin tightening and optimizing the systems they utilize to track financial matters.

Also in the report released recently, the regulator gave Fannie Mae substantially more credit than Freddie Mac, saying that Fannie Mae's internal operations are satisfactory.


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