Settlement Reached Over Fannie Mae Accounting Fraud Claims

by Glen Shapiro, LawAndTax-News.com, New York

26 May 2006

It emerged on Tuesday that a settlement has been reached by two government regulators with the Federal National Mortgage Association (FNMA, or Fannie Mae) over allegations that executives at the government-sponsored corporation were involved in fraudulent accounting activity.

The Office of Federal Housing Enterprise Oversight (OFHEO) and the Securities and Exchange Commission revealed that Fannie Mae has agreed to implement corrective measures and pay a collective penalty of $400 million dollars as part of settlements with the two bodies.

The agreements come as OFHEO released its Report of the Special Examination of Fannie Mae. The report details an unethical corporate culture where Fannie Mae employees manipulated accounting and earnings to trigger bonuses for senior executives from 1998 to 2004.

OFHEO entered into the agreement in lieu of pursuing administrative or enforcement actions and to expedite movement toward reforms.

As part of the settlement agreement, OFHEO has directed that Fannie Mae limit growth of its portfolio mortgage assets to the level of December 31, 2005. OFHEO’s action is based on the ongoing internal controls, risk management and accounting deficiencies and the need for the Enterprise to provide the Office with an acceptable business plan for managing its market activities.

In addition to the $400 million penalty, OFHEO has directed Fannie Mae to undertake a review of current and separated employees for remedial actions. At the same time, Fannie Mae is directed to put in place qualified individuals with appropriate skills and adequate resources, and to provide a strong training program.

Commenting on the accounting fraud charges, James B. Lockhart, Acting Director of OFHEO observed that:

“As the OFHEO report shows, the image of Fannie Mae as one of the lowest-risk and ‘best in class’ institutions was a façade. In fact, it was just the opposite. They promoted unconstrained growth while undermining proper internal controls by under investing in systems, risk management and staff."

“Our examination found an environment where the ends justified the means. There was a systematic effort by senior management to manipulate accounting, reap financial rewards, and prevent the rest of the world from knowing about it."

Meanwhile, Stephen B. Ashley, Chairman of the FNMA Board put a different slant on the matter, announcing that:

"We are pleased that we have been able to reach a comprehensive agreement and bring these matters to a conclusion. This important step today builds on some of the changes and progress we have made over the past 18 months to rebuild the company and restore the confidence of our shareholders and stakeholders."

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