Here's a paragraph from OFHEO's scathing report on Fannie Mae's accounting practices that shouldbe memorized by the GSE's attorneys (as well as the attorneys for the GSE's board): "OFHEO believes that themethods selected and infrastructure developed to support the estimation of prospective unrecognized income or expense,were in fact designed to facilitate a proactive management of earnings that extended well beyond the flexibilitymerely afforded by the Enterprise's accounting for the current quarter's catch-up." In a nutshell, OFHEO believesthat Fannie's management manipulated earnings. Why would Fannie's executives do this? According to OFHEO, thiswas done in one instance (1998) so the company's senior managers could earn $23 million in bonus money. ($200 millionin expenses were deferred that year so bonus earnings triggers could be met.) Observers following the scandal saythe key issue OFHEO must prove is that management knowingly manipulated accounting rules in order to gain somethingof value -- in this case, cash (the bonuses). If management did this, said one Fannie Mae seller/servicer, thenthat constitutes a crime. Then again, Fannie's supporters argue that the accounting issues are so complex, convolutedand open to interpretation, that Fannie did not do anything (legally) wrong. What's next for Fannie? For OFHEO?As we went to press this weekend one thing was clear: OFHEO wants heads to roll at the company and has told theboard as much. Not only has the board hired its own attorney but sources say individual directors are scoutingfor counsel as well. There is one other point to keep in mind. When was the last time a regulator levied allegationsthis serious and didn't win? One other point: If Fannie has to restate earnings downwards (as some have speculated),does it have enough regulatory capital on hand? Stay tuned...
Serving on Fannie Mae's board is Fred Malek, a friend of Frank Raines, and chairman of ThayerCapital. Both men are involved in bringing the Montreal Expos to Washington...
Meanwhile, in case you missed it, former Freddie Mac chairman and CEO Leland Brendsel recentlywon his case against OFHEO and is now collecting some $53 million in back pay and compensation. Mr. Brendsel wasousted in connection with Freddie's $5 billion accounting scandal, which broke in June of last year. Freddie, though,restated earnings upwards by $5 billion...
Lost in all the Fannie Mae scandal news was one other important development this past week: The yield on the10-year Treasury fell below 4%. On Wednesday, a day after the Fed hiked short-term rates by 25 basis points,the yield fell to 3.98%. On Friday it was at 4.04%...
Nonconforming wholesaler First Franklin Financial has opened a new regional office, serving the Worthington,Ohio, area. FFF reports that Columbus is the fastest growing city in Ohio, and is seeing a surge in new residentialsubdivisions...
Fidelity National Financial recently announced the closing of a stock purchase agreement between itssubsidiary, Fidelity Information Services and Covansys Corp., and Covansys founder and co-chairman,Rajendra Vattikuti. Under the terms of the agreement, FIS purchased 8.7 million common shares from Covansysand 2.3 million common shares from Mr. Vattikuti, for a total purchase price of $121 million. FIS now owns 29%of Covansys' common stock. FIS, which operates the nation's largest mortgage "servicing bureau," alsoreceived four tranches of warrants...
MORTGAGE PEOPLE: Clear Capital has named Barry Bates as its vice president of portfoliodue diligence. Clear Capital is involved in loan valuation outsourcing. Mr. Bates' specialty is automated valuationmodels. Freddie Mac chairman and CEO Richard Syron will address the Banc of America Securities annualinvestment conference in San Francisco this Monday.
WASHINGTON NEWS: Senate appropriators are going along with the president's request to increaseOFHEO's budget by nearly 50%. The Senate Appropriations Committee has approved a $36.4 billion Departmentof Housing and Urban Development appropriations bill that includes $59.2 million for OFHEO's fiscal year 2005operations, up from $39.9 million this year. OFHEO -- as we all learned this past week -- supervises Fannie Maeand Freddie Mac. The Senate committee earmarked $5 million for litigation and a special examination of Fannie Mae'saccounting policies and practices. However, the Senate bill stipulates that the supervisory agency cannot use $10million of its appropriated funds until the Senate confirms a new director at OFHEO. The term of the current OFHEOdirector, Armando Falcon, expires Oct. 5. Mr. Falcon is expected to stay at this post until the presidentnominates a new director.
MORTGAGE DATA/RESEARCH NOTICE: National Mortgage News has just unveiled a new white paper on "Direct-to-ConsumerLending Over the Internet." For details contact Elizabeth Washington at: (202) 434-0328 or e-mail:
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