Wednesday, Oct. 6, 2004 | 9:03 a.m.
WASHINGTON -- Fannie Mae's chief executive and another top official are to appear before Congress to explain an accounting lapse at the mortgage giant amid regulators' allegations of earnings manipulation and management misdeeds.
It will be the first public appearance by chairman and CEO Franklin Raines since news of the allegations and a Securities and Exchange Commission inquiry into government-sponsored Fannie Mae surfaced on Sept. 22. Lawmakers have cited Raines' assurances to investors a little over a year ago that Fannie Mae, which finances one of every five home loans in America, had not "undertaken any transactions to distort our true financial condition."
Raines and the company's chief financial officer, Timothy Howard, have been put on the defensive by a recent government report that criticized Fannie Mae's "culture and environment" for making "these problems possible." The Washington-based company, which is the second-largest financial institution in the United States, is also facing a criminal investigation by the Justice Department.
They were to testify today before a House Financial Services subcommittee that oversees Fannie Mae and Freddie Mac, its smaller rival in the multitrillion-dollar home mortgage market. The Office of Federal Housing Enterprise Oversight has singled out Howard for blame in the scandal, saying in a report of the regulators' ongoing investigation that he failed to provide adequate oversight.
The House panel's chairman, Rep. Richard Baker, R-La., is a longtime critic of Fannie Mae and Freddie Mac -- which restated some $4.5 billion in earnings last year, ousted top executives and was fined a record $125 million in a settlement with regulators.
Citing the new allegations concerning Fannie Mae, Baker has declared: "Investors have been fooled, homebuyers have been cheated and taxpayers are at risk."
No specific finger has been pointed at Raines, a prominent Washington and business figure who was a White House budget director under President Clinton. Regulators have raised the possibility of a management overhaul, however.
It is "difficult to assert ... confidence" in management's ability to change the company's culture and operations, Armando Falcon, the head of OFHEO, told the Fannie Mae board last month.
Fannie Mae shares have tumbled 17 percent in recent weeks, and some in Congress and on Wall Street have called for the removal of Raines and other senior executives. The shares were slightly higher Tuesday on the New York Stock Exchange, rising 29 cents to close at $66.00
"Investors are feeling as though Frank Raines didn't level with them with respect to the issues that Fannie Mae had," said Lynn Turner, a former chief accountant at the SEC. "It is very difficult for a board to support a CEO who has damaged his credibility with investors."
As CEO, Raines certified in writing the accuracy of Fannie Mae's financial results, so he would have violated a law -- enacted in response to the 2002 corporate scandals -- had he been aware of the accounting irregularities when he signed off.
In mid-2003, after the accounting scandal erupted at Freddie Mac, Raines said his company didn't "have any of the same issues" and hadn't "undertaken any transactions to distort our true financial condition."
The result of the inquiries by Congress and the government could eventually ripple out to millions of Americans if they have to pay higher rates for new home mortgages or for refinancing, some analysts say. Those could be among the consequences if Fannie Mae is required to scale back its purchases of mortgages and forced to pay higher rates on its nearly $1 trillion in debt held by investors in the United States and worldwide.
Fannie Mae and Freddie Mac, while not directly guaranteed by the government, have special privileges including the ability to borrow directly from the U.S. Treasury. In return, they are charged with enabling more low-income and minority people to buy homes.
The implicit links with the government allow Fannie Mae and Freddie Mac to typically borrow money at lower rates than the competition. Those funds are then used to purchase and guarantee billions of dollars of mortgages from banks, many of which are then packaged into securities that are resold on Wall Street.
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