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Fannie Mae Apologizes for Accounting Failures

By Annys Shin and Kathleen Day
Washington Post Staff Writers
Thursday, April 21, 2005; Page E01

Fannie Mae interim chief executive Daniel H. Mudd apologized to Congress yesterday for the company's massive accounting failures, as key government officials prepared to press their case today for stricter regulation of the company and its smaller rival, Freddie Mac.

"I am sorry," Mudd told the Senate Banking Committee, adopting a conciliatory tone that contrasted sharply with the final congressional testimony of his predecessor, Franklin D. Raines, who had refused to concede that the company made any mistakes. The Fannie Mae board ousted Raines in December because of the accounting foul-ups.

"I am sorry," Fannie Mae interim chief Daniel H. Mudd told the Senate committee. (Ken Cedeno -- Bloomberg News)

Mudd's comments came as officials from the Office of Federal Housing Enterprise Oversight, which is the companies' regulator, and other agencies prepared to testify today that a new, independent regulator for Fannie and Freddie should have broad power to limit the companies' holdings, according to sources familiar with the testimony who spoke on condition of anonymity because it is not yet public.

OFHEO Director Armando Falcon Jr. plans to tell the committee that the companies' investments should be tied to their mission of keeping mortgage markets well supplied with cash and of promoting homeownership among underserved consumers, sources said.

Congressional Budget Office Director Douglas Holtz-Eakin plans to say that government-chartered Fannie and Freddie have done the job Congress created them to do and that the private sector can now perform that function, sources said.

The hearings yesterday and today are part of a series the Senate committee is holding as Congress considers replacing OFHEO with a more powerful agency to govern Fannie and Freddie.

The firms -- government-chartered but stockholder-owned -- benefit from hundreds of millions of dollars in federal subsidies, such as cheap borrowing costs. The companies buy mortgages from banks so that banks can lend more money to home buyers. Fannie and Freddie mostly bundle the home loans into securities they sell to investors, but in the past decade they increasingly have held onto the loans or bought back the securities for their own investment portfolios.

The two companies now hold $1.5 trillion in loans and loan-related securities, which is nearly 20 percent of the nation's $8 trillion market of outstanding mortgages. Federal Reserve Chairman Alan Greenspan, key members of Congress and the Bush administration say the concentration of ownership poses risks to the financial system and possibly taxpayers without doing much to further the company's mission of facilitating homeownership. Greenspan and others say the profit the companies make on their portfolios goes mostly to shareholders, not to homeowners.

OFHEO, the Securities and Exchange Commission, and the Department of Justice are investigating Fannie's accounting problems, including the use of phony signatures to alter the company's books in a way that triggered millions of dollars in bonuses for top executives.

Mudd and Freddie Mac chief executive Richard F. Syron yesterday threw their support behind creating a more authoritative regulator, but they opposed several of the specific powers Congress wants the regulator to have. They cautioned lawmakers that forcing them to win regulatory approval for new mortgage products would hamper their ability to innovate and help expand the mortgage market. They also opposed limiting the companies' investment portfolios -- a topic that dominated discussion in the committee.

Syron argued that if Fannie and Freddie's portfolios were limited, the risk inherent in those loans would simply be shifted elsewhere in the financial system. Mudd said capping the holdings of Fannie and Freddie would give them less flexibility to keep the housing market supplied with cash in times of crisis, such as following the Sept. 11, 2001, terrorist attacks. Greenspan and others have questioned whether the two mortgage giants filled such a role.

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