By Annys Shin and David Hilzenrath
Washington Post Staff Writers
Thursday, November 9, 2006; D01
The chief regulator of Fannie Mae and Freddie Mac yesterday tightened its rules for overseeing the accounting, executive compensation and corporate governance practices at the two mortgage finance giants.
The Office of Federal Housing Enterprise Oversight said the changes, part of a series of "guidances" for its examiners, were intended to address problems the agency uncovered during its investigations into accounting problems at the two companies.
In May, Fannie Mae, of the District, agreed to pay $400 million to settle charges that it misstated its earnings by $10.6 billion to trigger millions of dollars in bonuses for top executives. In 2003, Freddie Mac, of McLean, agreed to pay $125 million to settle charges that it misstated earnings by nearly $5 billion. The scandals led to the ouster of top executives, including Franklin D. Raines as Fannie Mae chief executive and Leland C. Brendsel as Freddie Mac chief executive.
Fannie Mae and Freddie Mac, the nation's two largest sources of mortgage money, keep funds flowing to the housing market by buying mortgages from banks and other lenders.
The guidance issued yesterday was effective immediately because it is considered a detailed elaboration on existing regulations and does not require a public comment and notice period.
One point addresses problems the government has had in recovering compensation from top Fannie Mae and Freddie Mac executives who were pushed out as a result of the accounting scandals. It requires the companies to include provisions in future employment contracts about returning bonuses and salaries if executives are fired "for cause" in cases of misconduct.
In September, OFHEO Director James B. Lockhart III said the agency was considering suing Raines and J. Timothy Howard, Fannie Mae's former chief financial officer, to recover compensation. OFHEO is still trying to force Brendsel and Freddie Mac's former chief financial officer, Vaughn A. Clarke, to return compensation.
Another guidance issued yesterday stipulates that the responsibilities of the board of directors go beyond a short-term focus on maximizing shareholder value to address internal controls and organization, such as assigning the role of chairman to an independent board member. Both companies previously had allowed the chief executive to also be chairman.
Fannie Mae and Freddie Mac officials declined to comment on the changes. The companies have 150 days to tell OFHEO how the guidances will affect their business. Both have not filed updated financial reports since the scandals; Fannie said yesterday that it expects to spend more than $1 billion on the effort this year.
In an interview earlier this week, Lockhart said legislation is needed to strengthen supervision of the companies.
"These companies still cannot produce audited accounts. They're at least several years away from restoring themselves to full financial health, having proper internal controls," he said. "I think any company that cannot produce audited financials is in a crisis."
Proposed legislation has been stalled because lawmakers cannot agree on how to control the scale of the companies' investments. Critics contend their sheer size makes them a threat to the stability of global financial markets.
Lockhart said Congress could pass the legislation before the lame-duck session ends.
But former Freddie Mac lobbyist Mitchell Delk said the impetus for legislative action has faded.
"I think the crisis has abated," he said. "Now that there is really no crisis, one could argue that . . . the risk of draconian action by the Congress, regardless of which party is in control, has abated."