Constraints On Freddie, Fannie May Last Years

By David S. Hilzenrath
Washington Post Staff Writer
Wednesday, June 7, 2006

Federally chartered housing finance companies Fannie Mae and Freddie Mac, which have been recovering from billions of dollars of accounting errors, are probably several years away from having adequate internal controls, a top regulator testified yesterday.

James B. Lockhart III, acting director of the agency that oversees the companies' financial safety and soundness, told lawmakers that he did not envision a quick end to recently imposed restrictions on the level of Fannie Mae's mortgage-related investments.

"Frankly, it's hard to see a total removal of limits for several years," Lockhart told the House subcommittee on capital markets.

Lockhart said that his agency, the Office of Federal Housing Enterprise Oversight, has been talking to Freddie Mac about freezing the growth of its investments, too.

The investments leave the companies vulnerable to shifts in interest rates and other economic shocks, potentially putting the overall financial system at risk, some policymakers argue.

Fannie's share price declined yesterday by 1.88 percent, to $49.08, and Freddie's fell by 3.31 percent, to $58.11.

The hearing yesterday before a subcommittee of the House Financial Services Committee follows the release last month of an OFHEO report that said Fannie executives had routinely manipulated the company's accounting in recent years to maximize their bonuses. The report criticized the company's board for lax oversight. Fannie agreed to fines of $400 million by OFHEO and the Securities and Exchange Commission.

Both companies have been struggling to fix their books and to file accurate and up-to-date financial statements.

During yesterday's hearing, subcommittee Chairman Richard H. Baker (R-La.) said former Fannie chief executive Franklin D. Raines appears to have committed perjury when he testified about Fannie's accounting before the panel in 2004. A spokesman for Baker, Michael DiResto, said Baker is considering referring the matter to the Justice Department.

An attorney for Raines declined to comment on the allegation.

Members of the House, the Senate and the Bush administration have been talking since early 2003 about tightening regulation of Fannie Mae and Freddie Mac, when Freddie announced that it expected to restate earnings. The House and the Senate Banking Committee have passed different bills, but the full Senate has not taken up the matter.

Carolyn Weyforth, a spokeswoman for Senate Majority Leader Bill Frist (R-Tenn.), said yesterday that "no decisions have been made" on how or when to bring the legislation to the Senate floor.

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