Fannie Mae (FNM)

[HenryTo]

Chances Improve
For Passage of Bill
On Fannie, Freddie

By JAMES R. HAGERTY and DAWN KOPECKI
Staff Reporters of THE WALL STREET JOURNAL
April 8, 2005; Page B2

The Bush administration signaled a willingness to be flexible on legislation to toughen regulation of Fannie Mae and Freddie Mac, improving chances that such a bill will be passed this year.

Treasury Secretary John Snow repeated his view that limits should be placed on the size of the two government-sponsored companies' holdings of mortgages and related securities. At a hearing of the Senate Banking Committee yesterday, though, Mr. Snow didn't ask Congress to set a specific statutory limit on those portfolios. Instead, he said a new, more-powerful regulatory agency for Fannie and Freddie could decide exactly what kind of limits to impose.

That approach would spare Congress a technical debate over numbers and may remove a potential obstacle to legislation. The administration has been pushing for such legislation in light of accounting scandals at Fannie and Freddie. Previous efforts to win similar legislation stalled in 2003 and 2004.

"There's a clearer road map toward legislation than there was a week ago," said Howard Glaser, a Washington consultant who served as a housing official in the Clinton administration.


The two companies pump money into the housing market by buying mortgage loans from lenders and packaging those loans into securities for sale to investors. But they also hold a combined $1.5 trillion of loans and related securities on their books. Fannie and Freddie say those holdings help ensure a steady supply of money for home loans. But the administration, backed by Federal Reserve Chairman Alan Greenspan, argues that the large mortgage holdings don't have much effect on rates paid by consumers. The administration also argues that Fannie and Freddie have grown so large that a stumble in their complex hedging activities could cause a financial crisis.

Mr. Snow suggested that Congress could provide "policy guidance to the new regulator that says, 'You have some discretion here but you should use that discretion to limit those portfolios' " to the amount necessary to ensure smooth functioning of the market for mortgage-backed securities, which provide funding for home loans.

Sen. Richard Shelby (R, Ala.), chairman of the Senate Banking Committee, backed the idea of granting the companies' new regulator discretion over the size of the mortgage portfolios. That would give the regulator huge powers over the companies' businesses and reduce their chances of returning to the double-digit growth rates they boasted until recently. The legislation also is expected to give the new regulator the power to raise minimum capital requirements.

The new regulator would replace the Office of Federal Housing Enterprise Oversight.

Supporters of Fannie and Freddie remain wary of giving regulators too much power. Sen. Charles Schumer (D, N.Y.) warned against any moves that might disrupt the housing market. "We ought to proceed with a great deal of caution, and maybe some humility," he said.

[HenryTo]

Still difficult to say what Congress will do with Fannie and Freddie at this point, since traditionally, politicians just like to keep the status quo until something bad happens. I wonder when Fannie will complete their restatement of earnings?
----------------------------------------------------------------------
Fannie Mae Boosts Capital Base;
Greenspan Renews Call for Limits

By JAMES R. HAGERTY
Staff Reporter of THE WALL STREET JOURNAL
May 20, 2005

Fannie Mae's regulator said the company has bolstered its capital, though its exact financial position remains clouded pending completion of a planned restatement of earnings and changes in accounting practices.

Meanwhile, Federal Reserve Chairman Alan Greenspan repeated his call for Congress to impose tight limits on the amount of mortgages and related securities that can be held by Fannie and its smaller rival, Freddie Mac. Congress is considering legislation to toughen regulation of the two government-sponsored providers of funds for home mortgage loans.

The Office of Federal Housing Enterprise Oversight, or Ofheo, said Fannie Mae was "adequately capitalized" as of March 31. At the end of 2004, Ofheo found, the company was "significantly undercapitalized."

The regulator makes quarterly assessments of the company's capital, a process that has been complicated by accounting problems at Fannie. The Securities and Exchange Commission found in December that Fannie had violated accounting rules on the valuation of derivative contracts used to hedge interest-rate risks. As a result, Fannie plans to restate earnings for the past several years. The company has estimated that it will have to record losses on those derivatives of as much as $10.8 billion.

To improve its capital position in light of the SEC finding, Fannie has halved its dividend, issued $5 billion in preferred stock, and sold some of its huge portfolio of mortgages and related securities. As a result, Ofheo estimated, Fannie's core capital as of March 31 stood at $35 billion, up from $32.64 billion on Dec. 31 and $28.86 billion on Sept. 30.

Ofheo said the figures are based on Fannie's estimates of its financial position, adjusted for previous accounting errors, and are subject to change as more information becomes available.

The House Financial Services Committee may vote as early as Wednesday on legislation to tighten regulation of Fannie and Freddie. Mr. Greenspan has been trying to persuade Congress to include a provision that would require the companies to shed gradually the bulk of their holdings of mortgage loans and securities. That would leave them to focus on the business of creating and guaranteeing such securities for sale to other investors.

Mr. Greenspan proposed that Fannie and Freddie retain in their portfolios only those loans "that are very difficult or unduly expensive" to bundle into securities that can be sold to others.

In a speech to a housing conference yesterday, the Fed chief reiterated that the companies eventually could set off a financial crisis if they keep expanding and taking risks on changes in interest rates. Fannie and Freddie have long argued that their purchases of mortgages and related securities help lower costs for U.S. consumers and ensure a steady supply of funds for 30-year, fixed-rate mortgages. But Mr. Greenspan argued that such mortgages would be available even if Fannie and Freddie are forced to shrink their portfolios and that the two companies don't have any "notable" effect on mortgage rates paid by consumers.

Write to James R. Hagerty at bob.hagerty@wsj.com

[nodoodahs]

Leave aside for a moment the issues with derivatives as investments; ignore the fact that FNM is now 9 months behind most companies in stating earnings; FNM would be a "sell" based on solvency measurements alone.

DE in the 20's, Interest Coverage in the 1.3 range per MSN money.

But as you've probably noticed, I have my own pet metrics for solvency. For the five years I can find, [Tot. Liab/OCF] ranges from 52 to 72. So if they turned all their operating cash flow to paying off debt, with no interest, it would take them until around 2055. Their [Interest / (OCF + Interest] ratio ranged from 0.66 to 0.77. Stretch that 2055 out to at least 2160 to pay off their debt.

FNM, GM, and DAL all have some of the worst numbers I've ever plugged through my spreadsheets. Anyone caught dead holding these equities shouldn't be investing. That includes fund managers.

[HenryTo]

Looks like Congress isn't going to do much about FRE and FNM after all. Former is up $1.56 and latter is up $1.74 as I am writing this:
-------------------------------------------------------------------------------
WASHINGTON (Reuters) - U.S. Treasury Secretary John Snow on Thursday said he was disappointed with legislation cleared by a House committee on Wednesday to overhaul regulation of mortgage finance giants Fannie Mae (NYSE:FNM - news) and Freddie Mac (NYSE:FRE - news) and hoped the bill could be strengthened.

Snow, speaking to reporters after a Senate Banking Committee hearing, said the House bill needed to be strengthened "in several material respects."

"We clearly have some work to do there," Snow said.

"I'm disappointed with what came out of the House yesterday and that legislation, to be consistent with our policies, needs to be strengthened in several material respects," he said. "I hope that can be done on the (House) floor and I hope that the Senate will produce a much better bill."

The House Financial Services Committee approved legislation on Wednesday to create a new regulator with more authority over Fannie's and Freddie's business.

While giving the regulator power to order the companies to adjust their $1.5 trillion investment portfolios, the bill does not direct the supervisor to do so, as the Bush administration had requested.

Snow, after the 65-5 vote to approve the House bill, said it was "critical" to direct the regulator to place limits on the size of the companies' retained mortgages portfolios.

Fannie and Freddie are shareholder-owned companies chartered by Congress to support homeownership by ensuring a liquid mortgage market. To do this, they buy mortgages from originators and repackage them for sale as securities to investors.

They also hold some loans and securities in their portfolios, which, the companies say, helps them fulfill their federally mandated mission.

But Federal Reserve Chairman Alan Greenspan has said those portfolios pose a risk to the broader financial system by aggregating so much interest rate and prepayment risk within two companies. Greenspan and Snow have asked Congress to direct the regulator to limit those holdings.

In the Senate, the chairman of the Banking Committee, Alabama Republican Sen. Richard Shelby (news, bio, voting record), is expected to offer a bill to stiffen oversight of the companies. He has previously indicated that Congress should give the regulator flexibility to decide whether portfolio cuts are warranted.

[HenryTo]

Key is that the House has clearly rejected both Bush's and Greenspan's calls to limit the size of both FRE and FNM's portfolios. Moreover, loan limits have also been raised from the current level of approximately $359,000 to approximately $500,000. Party on.
----------------------------------------------------------------------
Fannie-Freddie Curbs
Win Backing

House Panel Clears Limits
But Allows Bigger Loans;
Bill Omits Bush Provision
By DAWN KOPECKI and JAMES R. HAGERTY
Staff Reporters of THE WALL STREET JOURNAL
May 26, 2005; Page A3

WASHINGTON – The House Financial Services Committee overwhelmingly approved legislation to tighten regulation of Fannie Mae and Freddie Mac while expanding their reach by removing a restriction on purchases of large loans in high-cost areas.

The legislation, approved in a 65-5 bipartisan vote, doesn't include a provision sought by the Bush administration that would force the two companies to slash their holdings of mortgage loans and related securities. The vote illustrates that, despite accounting scandals at the two companies, they retain strong support in Congress as well as in the housing and mortgage-banking industries. Allies of the companies have warned politicians that any major curtailment of their activities could hurt the housing market -- a point hotly disputed by the administration.

The bill now heads for a full House of Representatives vote as early as this summer. The Senate Banking Committee is expected to vote on its version of the legislation next month.

Bush administration officials credited the House committee's chairman, Michael Oxley (R., Ohio), with improving on previous legislative efforts but said the legislation lacks essential ingredients. "It fails to include key provisions the administration considers essential to protect the safety and soundness of the housing finance system," said White House spokesman Trent Duffy.

One provision included in the bill would increase the size of the loans Fannie and Freddie are allowed to purchase, raising their loan limits from the current level of $359,650. In high-cost areas, they could buy loans of as much as 150% of median home prices. That would bump up Fannie and Freddie's current loan limits to well over $500,000 in many booming real-estate markets, such as California. "The administration believes the [companies'] mission should be focused on expanding housing opportunities for low- and moderate-income Americans," Mr. Duffy said.

The committee rejected the administration's call for a provision restricting Fannie and Freddie to holding only those mortgages that can't easily be pooled into securities for sale to other investors. The bill would allow a new regulatory agency to order the companies to sell assets in certain circumstances, however.

Reacting to the vote, Treasury Secretary John Snow said in a statement that the administration would push for tougher legislation and that limits on the companies' mortgage holdings are "critical."

Housing Secretary Alphonso Jackson said the "administration is concerned" that Mr. Oxley's bill was missing "some core principles, essential to ensuring the [Government Sponsored Enterprises] fully carry out the mission granted to them by Congress of promoting affordable housing and homeownership."

The bill would create a regulatory agency to replace the Office of Federal Housing Enterprise Oversight, which now regulates Fannie and Freddie, and the Federal Housing Finance Board, which supervises the 12 regional Federal Home Loan Banks. The new regulator would have power to raise minimum capital requirements and block efforts to diversify into new businesses.

Congress has been debating how to improve regulation of these companies for nearly two years, since Freddie Mac disclosed that it had violated accounting rules in an effort to make its earnings appear less volatile. Support for the legislation grew last year after regulators found that Fannie also had violated accounting rules.

The House panel's vote was a strong rebuff to Treasury Secretary Snow, Federal Reserve Chairman Alan Greenspan and others who have urged Congress to constrain Fannie and Freddie much more tightly.

The two companies were both chartered by Congress to help finance housing. They buy residential mortgage loans from lenders and bundle the loans into securities. Fannie and Freddie hold some of the securities on their own books and sell others to investors. The administration wants the companies to focus almost exclusively on providing payment-guarantees on mortgage securities for sale to other investors. That would mean shrinking their holdings of mortgages and mortgage securities, which currently total about $1.5 trillion, or nearly one-fifth of U.S. residential mortgage debt outstanding.

Write to Dawn Kopecki at dawn.kopecki@dowjones.com and James R. Hagerty at bob.hagerty@wsj.com

[HenryTo]

Not sure if anyone else has an opinion but Mr. Mudd seems to be a good candidate for the CEO office at FNM.
--------------------------------------------------------------------------------
Fannie Mae Drops Interim From CEO Title
Wednesday June 1, 5:49 pm ET
By Joe Bel Bruno, AP Business Writer
Fannie Mae Board Drops Interim From Title of Chief Executive Officer Daniel Mudd


NEW YORK (AP) -- Fannie Mae's board of directors on Wednesday removed the interim from the title of Chief Executive Officer Daniel Mudd, another step in the mortgage lender's struggle to recover from an accounting scandal.

Mudd, who previously served as chief operating officer, became interim head after an executive shakeup last December at the company headquartered in Washington, D.C. Former CEO Franklin Raines retired amid regulatory questions about accounting practices that may result in the company being forced to acknowledge it overstated earnings by as much as $11 billion in recent years.

"The board wanted to see a transformation at Fannie Mae. Over the past six months, Dan Mudd has begun to put Fannie Mae on the right track, and we are confident that Dan will continue to lead the company in this new direction," said Chairman Stephen Ashley, who the company also announced will continue in that role.

Ashley also noted that the board conducted its review, consideration and selection of Mudd as CEO in consultation with the Office of Federal Housing Enterprise Oversight, the company's lead regulator.

Prior to joining Fannie Mae, Mudd was president and chief executive of GE Capital, Japan. He began his career at GE Capital in 1991. Mudd was also an officer in the U.S. Marines, where he was decorated for combat service in Beirut, Lebanon. In addition, he is the son of television journalist Roger Mudd.

Mudd will lead the government-sponsored company, which is the largest U.S. buyer and guarantor of home mortgages, through one of its most challenging periods. Federal regulators are continuing to investigate the company's accounting procedures, which has caused the Securities and Exchange Commission to demand it restate earnings back to 2001.

OFHEO also has been investigating Fannie Mae's accounting since last year. Among the accounting problems uncovered by the agency is the company's violation of rules related to derivatives -- financial instruments that it uses to hedge against swings in interest rates.

OFHEO has given Fannie Mae until Sept. 30 to boost its capital cushion against risk by 30 percent, or some $5 billion.

Last month, Fannie Mae again missed a regulatory deadline for filing a financial report, this time for the first quarter. The company still hasn't filed its third-quarter or annual report for 2004 with the SEC, and has said it is unable to provide "a reasonable estimate" of its earnings for 2003 and 2004.

In addition, the company faces new legislation that would strengthen the government's control over it and Freddie Mac. However, a bill passed by the House last month falls short of the Bush administration's proposal to significantly reduce their multibillion-dollar holdings.

Fannie Mae shares fell 28 cents to $58.96 in trading Tuesday on the New York Stock Exchange. They have traded between $49.75 and $77.80 a share in the last 52 weeks.

[HenryTo]

Still not a pretty picture at Fannie Mae. Any trades initated on FNM should only be short-term in nature, IMHO.
------------------------------------------------------------------------------
Fannie's regulator says some fixes will take years
Wed Jun 15, 2005 11:21 AM ET

WASHINGTON, June 15 (Reuters) - Mortgage finance company Fannie Mae (FNM.N: Quote, Profile, Research) still faces several operational risks, and many problems uncovered in a probe of its multibillion-dollar accounting flaws could take years to fix, a U.S. regulator said on Wednesday.

The U.S. Office of Federal Housing Enterprise Oversight, in an annual report to Congress that reviews oversight activities in 2004, said Fannie Mae's new management has started a program to correct some problems, but it was too soon to know if the company's plan will be effective.

"Overall, Fannie Mae's condition warrants significant supervisory concern," the regulator said in its report.

OFHEO said Freddie Mac (FRE.N: Quote, Profile, Research) , Fannie's sibling government-sponsored housing enterprise, was improving but continues to warrant supervisory concern after accounting problems there led to a $5 billion earnings restatement.

Fannie Mae's accounting problems, still under investigation by regulators, could lead to a profit restatement of as much as $11 billion. That would make it one of the largest restatements in U.S. corporate history.

OFHEO's report detailed extensive deficiencies in Fannie Mae's internal and financial controls, which contributed to overly aggressive or noncompliant accounting practices. The regulator also listed operational risks facing the company, and said fixing some of those problems, such as implementing new systems for financial records, could take years to address.

"In addition to deficiencies discovered through reviews conducted by OFHEO and Fannie Mae management, new issues continue to emerge that indicate that operations controls need strengthening," the report said.

"The full picture of the quality of operations risk management will not be known until the Board consultants and the external auditor complete their analyses and OFHEO completes its ongoing examination," OFHEO wrote to Congress.

Fannie Mae's earnings in 2004 were called "satisfactory" by OFHEO, but the regulator noted the results will be revised "significantly" when the ongoing investigation and restatement process are completed.

Earnings in 2005 will be affected by asset reductions needed to build capital and higher expenses from the restatement effort and systems upgrades, the regulator said.

Shares of Freddie Mac fell 30 cents to $64.56 while Fannie shares were down 7 cents at $58.29 in morning trade. Both stocks have suffered this year as the companies face scrutiny in Congress and the possibility of legislation to stiffen regulation following accounting problems.

FREDDIE MAC

Like Fannie Mae, Freddie Mac does not have current financial statements and has said it expects to post first- and second-quarter results in August.

"The ability to release timely financial statements remains a substantial challenge for Freddie Mac," OFHEO said.

To return to regular financial reporting Freddie Mac must, according to the regulator, implement a more disciplined and formal control environment and move toward greater reliance on automated, preventative controls rather than manual, detective controls. The company must also establish a reliable self-assessment framework for internal controls, OFHEO said.

But Freddie's credit risk management, liquidity and interest rate risk management were "satisfactory" in 2004, the regulator said.

[HenryTo]

Looks like the accountants are not done yet.
---------------------------------------------------------------------------
Fannie Mae Finds New Accounting Errors
Monday March 13, 10:51 am ET
By Marcy Gordon, AP Business Writer
Embattled Mortgage Company Fannie Mae Says It Has Found New Errors in Accounting Review

WASHINGTON (AP) -- Embattled mortgage giant Fannie Mae disclosed Monday that it had found additional errors in the reworking of its accounting ordered by federal regulators.
The government-sponsored company, which finances one of every five home loans in the United States, said it had made "substantial progress" toward completing its accounting review but expects to miss a regulatory deadline for filing its annual financial report for the second straight year. The deadline for the filing is Thursday.

Fannie Mae also said that it expects an upcoming internal report to show that the company's financial controls remained deficient as recently as the end of last year.

Federal regulators in 2004 accused Fannie Mae of serious accounting problems and earnings manipulation to meet Wall Street targets, and the Securities and Exchange Commission ordered the company to restate earnings back to 2001 -- a correction expected to reach an estimated $11 billion. The Justice Department is pursuing a criminal investigation.

The company does not expect to complete the reworking until the second half of this year. Fannie Mae said in its SEC filing Monday that it has completed "the process of identifying accounting issues for review."

"Although our review of accounting policies and practices is not complete, we have made significant progress in completing our analysis and determination with respect to the accounting issues we have identified," Fannie Mae President and CEO Daniel Mudd said in a statement.

The company said the newly disclosed accounting errors are in areas including certain loans, investment securities, guaranty fees charged to banks and other mortgage lenders, and reverse mortgages. Fannie Mae did not provide an estimate of the amounts of the errors.

Similarly, Fannie Mae in November disclosed new accounting problems that had been uncovered in several areas, including recording losses on mortgages and the mortgage-backed securities it guarantees as well as expenses for financing some real estate investments and accounting for low-income housing tax credits and mortgage insurance.

They all are in addition to the accounting-rule violations that came to light in September 2004 involving derivatives, the financial instruments Fannie Mae uses to hedge against swings in interest rates, and its mortgage commitments.

A company-ordered report released last month detailed a breakdown in financial controls and found an arrogant corporate culture at Washington-based Fannie Mae. The report, which followed a 17-month investigation by a team led by former Sen. Warren Rudman, said that Fannie Mae's former finance chief and controller share primary responsibility for the accounting failures.

Fannie Mae and Freddie Mac, its smaller rival, were created by Congress to pump money into the $8 trillion home-mortgage market. They buy and guarantee repayment of billions of dollars of home loans each year from banks and other lenders, then bundle them into securities that are resold to investors worldwide.

Freddie Mac, which had its own accounting scandal in 2003, said Friday that it will report its financial results for 2005 in May rather than March, as previously planned, because it needs more time to institute a new method of valuing some assets.

[rffrydr]

Bad news grinds on: WSJ report FNM tied up accountants, hiring to keep from working for others. Tricky.

[HenryTo]

Carol Loomis from Fortune discussing the "noncumulative" preferred shares of both Fannie and Freddie and why these are the potential "Achilles' Heels" for both GSEs:

http://money.cnn.com/2007/11/23/magazines/fortune/loomis_freddie.fortune/index.htm

[HenryTo]

No surprises here. Fannie Mae cuts the common dividend by 30% and tries to raise additional capital:

http://www.marketwatch.com/news/story/fannie-mae-cutting-dividend-offering/story.aspx?guid=%7BBEF8C3CB%2DD8E5%2D46CB%2DB602%2D7C38B30B0A28%7D&siteid=yhoof