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Real estate industry reacts to Fannie Mae shakeup

December 23, 2004

Management changes in wake of accounting mishaps

By Samantha Peterson
Inman News

The real estate industry appears relatively unconcerned by the recent management shakeup at Fannie Mae, with most saying business will go on as usual despite who heads the nation's top source of financing for home loans.

"I don't think it'll make an impact on the housing market," said Bill Moody, president of Lenders First Choice, a title company in Simi Valley, Calif. "I'm not convinced that you're going to stop that machine just by changing the head person."

Fannie Mae announced late Tuesday that CEO Franklin Raines had taken early retirement and that chief financial officer Timothy Howard resigned. The departures came less than a week after the Securities and Exchange Commission directed the company to make accounting corrections that could erase $9 billion of past profit.

Despite that possibility, Manny Couto, broker of Rosa Agency in Kearny, N.J., believes that Fannie Mae overall is doing a good job for the housing industry, shareholders and the general public. He said investor confidence in the company remains fairly high, and since the average American homeowner doesn't realize who is funding their mortgage money, the ongoing issues likely won't bother them.

Fannie is a shareholder-owned corporation chartered by Congress to maintain a steady flow of mortgage funds for the nation's housing market. Along with its corporate cousin, Freddie Mac, Fannie securitizes and either resells or owns a substantial portion of the outstanding home mortgage debt in the United States.

Couto said the Freddie Mac accounting scandal that rocked investors last year had more of an impact than the one at Fannie Mae is having because people were caught off-guard. Freddie Mac's problems resulted in a $5 billion earnings restatement, a $125 million fine and the replacement of top executives. Couto said the Fannie news surprised some people, but many others thought something like it might happen at some point because of what happened at Freddie Mac.

Fannie Mae has been on the defensive since September when its federal regulator, the Office of Federal Housing Enterprise Oversight, released a scathing 211-page report alleging the company used improper accounting techniques. Since then, Fannie has faced a Justice Department investigation, a civil investigation by the SEC, shareholder lawsuits and a congressional hearing.

Jonathan Kempner, president and CEO of the Mortgage Bankers Association, said he has a lot of respect for Raines, but knows that Fannie has a lot of strong people to carry on its mission.

"I'm confident that Fannie as an institution will endure," Kempner said.

The company will have to pause to get its internal operations in order, but in the long run, Fannie's shakeup won't have a substantial impact on the housing market, he said.

Fannie Mae is so large that changes at the top will take awhile to filter down to the point where they might affect those outside the organization, said Barry Kramer, operating principal of Keller Williams Realty in Phoenix. Such management changes will likely affect people in Washington, not those on the front line, he said.

Despite Raines' departure being a hot topic of Washington conversations, Moody said he doesn't expect Fannie's loan pricing and housing goals to be affected by the shakeup. The real estate industry's success depends on the liquidity that Fannie helps provide, which means the company will likely work past the scandals and "just put their nose to the grindstone," he said.

"There's the political part and then there's the reality of the business part," Moody said.

Paul Giannantonio, broker/owner of ERA American Dream, Realtors in Hillsborough, N.J., agreed the exit of top management won't impact business much. He said he can't imagine things shaking up so much that the mortgage company doesn't function anymore.

Mark Scott, spokesman for Atlanta-based HomeBanc, said he doesn't see the resignations and investigations having much impact in the short term.

"Fannie Mae is much bigger than its top leaders," Scott said. "The company has a clear mission and has hundreds of employees working diligently each day to facilitate that mission and probably thousands of companies, mortgage lenders and other partners with which it does

business. The current situation doesn't change those things and the company will continue to operate and facilitate home purchases as it always has until Congress takes whatever action they view as appropriate."

Attend Real Estate Connect NYC Jan. 9-11, 2005, the executive think tank addressing 2005 opportunities in real estate using online lead gen, the paperless transaction and digital media innovations. More info here. Longer term, Scott said, there's more potential for an effect since such shakeups could lead Congress to push harder for reform of Fannie and Freddie.

Industry observers have noted that Bush's re-election likely means the two government-sponsored entities will face tougher reform proposals in the past. Such changes also would be more likely to pass given the current political environment.

Any major changes to Fannie's mission, structure and abilities that dramatically impact the pace of the housing market could ultimately affect the entire economy, Scott said. It's still too early to know, however, what kinds of changes Congress might be thinking about and which ones would actually pass.

Regardless of whether Congress increases the government oversight of Fannie, some say the resignations and ongoing investigations could ultimately lead to a better managed company overall.

"Sometimes a shakeup is good for all industries," said Melvin Simpson, broker of Team1 DFW Properties in Dallas.

Fannie's shakeup could boost the company's image, spur whoever ultimately takes the reins to tighten up internal oversight and reassure stockholders.

Fannie Mae's stock was trading higher today than its Tuesday closing price. This afternoon the stock was at $72.10, up about 2.5 percent from Tuesday's closing price of $70.35.

Copyright 2004 Inman News



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