Fannie and Freddie's Regulator Received an Award? Why?!

I am a big believer in the regulation of the mortgage industry. Many borrowers are clueless, while the opportunities for lender mischief are great; for this reason, more regulation is needed. This statement might surprise you coming from a conservative guy like me. But the following really gets to me...

The Federal Housing Finance Agency (not to be confused with FHA, or the Federal Housing Authority, which insures FHA loans) was responsible for regulating Fannie Mae and Freddie Mac and now acts as their conservator, i.e. "nanny." The FHFA just announced that they received an award, the CEAR Award For Fiscal Responsibility and Accountability.

According to a news release from FHFA, "The CEAR (Certificate of Excellence in Accountability Reporting) is the highest award for outstanding accountability reporting in the federal government."

This news astonishes me – if there is one agency of the federal government that does not deserve praise, it is this one. It is instructive to examine the track record of this agency, formerly known as the Office of Housing Enterprise Oversight. Let's set the stage...

In 2004, the combined shareholder value of both Fannie Mae and Freddie Mac was $134 billion. Shortly thereafter began accounting scandals that allegedly resulted from manipulating of earnings. It seems to me that when regulators regulate and when auditors audit, they are supposed to reveal inconsistencies in regulation and accounting respectively. So, looking back now, we'd have to account for the oversight that did occur as a failure.

Next was the issue of exorbitant executive bonuses based upon these fraudulent earnings. Franklin Raines and two other executives were named in a civil suit wherein OFHEO attempted to get them to return bonuses paid on inflated earnings. The suit asked for $110 million in penalties and return of $120 million. It was ultimately settled for $3 million in penalties, and those were actually paid by Fannie Mae’s insurance company. Fannie Mae also ended up paying a $400 million civil fine. Another failure.

The successor CEO was Daniel Mudd who was CEO until he was fired in late 2008 when FHFA took over Fannie Mae. He was paid some $80 million during his tenure at Fannie Mae. Another failure

The stories at Freddie Mac aren't very different with earnings manipulations. A 2005 story in the New York Times:

"The size of the restatement also prompted some lawmakers and regulators to raise anew their concerns about how Freddie Mac is regulated and to call for more stringent oversight." 

More failures, but apparently no one in Washington read this article. Today, of course, not only has the $134 billion in shareholder value gone but the enterprises are in hock to the federal government for something approaching $100 billion. That’s a swing of almost a QUARTER OF A TRILLION dollars. That is about five times bigger than the Savings and Loan disaster 20 years ago. In fact, it must be the greatest single regulatory failure in the history of the planet. 

So for all of this wonderful regulation, FHFA will receive an award... For what? 

On the brighter side, according to notes at Wikipedia, in 2004 Working Mothers magazine named Freddie Mac one of the 100 best companies for working mothers. 

All of this and more is detailed in the book Fannie Mae and Freddie Mac: Scandal in U.S. Housing.

Randy Johnson – Author of How to Save Thousands of Dollars on your Home Mortgage and Savvy Borrower articles, Randy is a mortgage broker who has financed over $1 billion in properties. He writes about home buying and real estate finance topics for CreditBloggers.com.

Comments

[Gerri]

You're kidding right? Tell me it ain't so!! How could anyone present this award with a straight face?