Freddie, Fannie a 'Concern' To OFHEO

Fannie Mae chief Daniel H. Mudd's compensation rose 25 percent in 2006, to more than $14.4 million.
Fannie Mae chief Daniel H. Mudd's compensation rose 25 percent in 2006, to more than $14.4 million. (Carol T. Powers - Bloomberg News)
By David S. Hilzenrath
Washington Post Staff Writer
Wednesday, April 11, 2007

Fannie Mae and Freddie Mac, which are trying to fix widespread weaknesses in financial controls that contributed to accounting scandals in 2004 and 2003, "remain a significant supervisory concern," a federal agency responsible for regulating them said yesterday.

The government-chartered mortgage funding companies have taken much more time and money to put their houses in order than either they or regulators expected, the Office of Federal Housing Enterprise Oversight said yesterday in an annual report to Congress.

The scandals revealed severe flaws in the systems the companies use to manage their business and generate financial reports. Although they have corrected past accounting errors, neither company is able to issue timely quarterly financial reports, a basic requirement of any company whose shares trade on the stock markets.

"They dug an extremely, extremely big hole," the director of the regulatory agency, James B. Lockhart III, said at a news conference. "They just basically ignored the infrastructure of these companies for years."

The companies' status as government-sponsored enterprises has helped them to continue borrowing at favorable rates through their difficulties, Lockhart said. If another big financial institution had similar problems, regulators might have stepped in, he said.

However, both companies were profitable last year and had more capital than required, the agency reported.

A Fannie Mae spokesman declined to comment.

Freddie Mac is "pleased that in its annual report to Congress, OFHEO recognized the progress Freddie Mac has made since completing its restatement in 2003," Freddie Mac spokeswoman Sharon McHale said by e-mail. "Specifically, that the report's summary of examination conclusions noted that we are strong in the areas of capital and asset quality, as well as credit and interest rate risk management, among other things."

The report said Freddie Mac's efforts to fix problems "suffered during 2006 from ineffective planning and inconsistent execution."

"All internal control-related material weaknesses and significant deficiencies identified during 2005 or prior years' annual audits remain outstanding," the report said. "Although management and staff have worked hard to mitigate and remediate known control weaknesses, as of December 31, 2006, no remediation activity has been tested and verified to be effective."

Compensation for Freddie Mac's chairman and chief executive, Richard F. Syron, was reduced to $12.1 million in 2006 from $12.8 million in 2005 because, despite other successes, the company failed to meet goals for improving its financial reporting, McHale said in an interview.

Syron's 2006 compensation included a $2.4 million bonus and a stock award valued at $8.6 million, according to a recent Freddie Mac disclosure.

Fannie Mae chief executive Daniel H. Mudd received salary, stock and bonuses of more than $14.4 million in 2006, up about 25 percent from the year before.

Fannie Mae relied so heavily on outside contractors to upgrade its systems that it now faces the task of "transferring knowledge to employees as consultants leave," the report said.

"Deficiencies in contractor selection and management led to inefficiencies and adverse events," the report said.

Lockhart declined to explain the adverse events.

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