Fannie Mae has agreed to formally separate the roles of its chairman and chief executive, a move the mortgage finance company resisted for years but was forced to accept after a dispute over its management and accounting standards.
The action was announced yesterday as part of a new agreement with the Office of Federal Housing Enterprise Oversight, the federal agency that regulates Fannie Mae. OFHEO has been conducting a special examination of Fannie Mae for more than a year and last fall reached an accord in which the District-based company promised to improve its corporate governance and assure it has proper accounting systems in place.
The new agreement signed Monday expands on that earlier one and makes explicit the division of authority between the chairman and the chief executive. Former Fannie Mae executive Franklin D. Raines held both titles until he was ousted last year in the wake of conclusions by OFHEO and the Securities and Exchange Commission that the company had failed to follow a wide range of accounting rules.
OFHEO and others criticized Raines's dual offices, saying the company's board chairman needed to exercise independent judgment over the performance of its chief executive. By doing both jobs, they argued, Raines was essentially supervising himself.
After his retirement, the jobs were separated on an interim basis.
Fannie Mae's accounting problems are still being reviewed by OFHEO and the SEC but could cause the agency to have to reduce by about $9 billion the earnings it claimed since the beginning of 2001. The company, with a roughly $900 billion portfolio of mortgage loans, is integral to the operation of the nation's housing finance markets.
Along with separating the two top jobs, the new agreement specifies a series of other changes Fannie will make to improve its accounting, many of them underway or already completed.
Fannie's board agreed to conduct a full review of how employees enter financial information into the company's general ledger, the fundamental accounting tool in building financial statements. Fannie will set stricter rules for how employees make ledger entries, requiring that entries be properly documented and approved by someone other than the person making them. The company also agreed to correct a number of "deficiencies" in its mortgage portfolio accounting.
Fannie also agreed to create an ethics office with its own investigative staff. The person heading the office, who has yet to be named, will report both to the board's audit committee and to the chief executive.
Fannie Mae, chartered by Congress to assure a stable source of cash for the home mortgage market, buys loans from mortgage lenders and either resells those loans to investors or holds them for its own account. Both Fannie and its twin, Freddie Mac, are the biggest buyers of home mortgages.