White House starts special reviews of mortgage giants

WASHINGTON -- The Bush administration is starting special reviews of the financial operations of mortgage giants Fannie Mae and Freddie Mac.

The two government-sponsored companies, both of which have been roiled by accounting scandals in recent years, already have been under pressure from lawmakers and regulators who want their combined multitrillion-dollar mortgage holdings to be reduced. The administration has long been critical of the two companies, and officials have pointed to the accounting scandals to bolster their case that the massive mortgage portfolios are improperly managed and pose a risk to the financial system.

On Tuesday, two officials -- Housing and Urban Development Secretary Alphonso Jackson and Randal Quarles, Treasury undersecretary for domestic finance -- disclosed the new reviews by their departments in separate appearances before groups in Washington.

Quarles said he had directed Treasury staff to review the department's process for approving the massive mortgage-related debt issued by Fannie Mae and Freddie Mac.

Some Treasury officials have taken the view in recent years that the department has the authority to limit that debt.

The two companies were created by Congress to pump money into the home-mortgage market by buying home loans from banks and other lenders and bundling them into securities for sale on Wall Street. They have grown dynamically in recent years and now finance or guarantee some $4 trillion of home mortgages, representing about one-half of the single-family mortgages in the country.

"The time is right for Treasury to review its debt approval process to ensure that we continue to act as appropriate custodians of the power that Congress gave us when the charters of Fannie Mae and Freddie Mac were created," Quarles said in a text of his speech to the Women in Housing and Finance group. "I have asked the Treasury staff to undertake such a review to ensure that the process by which we exercise this responsibility is appropriate in light of all the circumstances."

HUD has oversight authority for the two companies' fulfillment of their mission of making housing affordable and the power to review new areas of business that they wish to enter. Jackson told a congressional gathering that the department also will begin to review their investments and holdings and some financial transactions that have raised concern on the part of regulators.

"HUD's primary concern is whether the (companies') investment activities are consistent with their charter authorities and public purposes and whether each is using the profits it derives ... for the purposes intended," Jackson said.

The chief regulator of the two companies said last week that the government will pursue some Fannie Mae executives to recover bonus money they reaped in an accounting scheme -- if Fannie Mae itself fails to do so.

The regulator, James B. Lockhart, is acting director of the Office of Federal Housing Enterprise Oversight. The agency last month issued a blistering report alleging a six-year accounting fraud at Fannie Mae, the second-largest U.S. financial institution after Citigroup Inc.

The report said Fannie Mae employees manipulated accounting to hit company quarterly earnings targets so senior executives could pocket hundreds of millions in bonuses from 1998 to 2004. The company -- whose accounting errors are estimated at some $11 billion -- was fined $400 million in a settlement with OFHEO and the Securities and Exchange Commission, one of the largest civil penalties ever in an accounting fraud case. Fannie Mae also agreed to temporarily cap its mortgage holdings at $727 billion.

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On the Net:

Fannie Mae: http://www.fanniemae.com

Freddie Mac: http://freddiemac.com

Treasury Department: http://www.ustreas.gov

Department of Housing and Urban Development: http://www.hud.gov