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Fannie Mae, Freddie Mac make agreement with regulator

September 6, 2005

OFHEO announces commitments

Inman News

The Office of Federal Housing Enterprise Oversight, regulator for Fannie Mae and Freddie Mac, has made formal agreements with the companies replacing voluntary commitments made in October 2000, OFHEO said Friday.

"These agreements represent an evolution from a set of voluntary actions to a set of enforceable commitments that will be overseen by OFHEO and will operate within a predictable supervisory framework," said OFHEO Acting Director Stephen A. Blumenthal.

The Office of Federal Housing Enterprise Oversight, or OFHEO, currently oversees the two government-sponsored enterprises.

OFHEO last year uncovered accounting violations at Fannie Mae, setting off investigations by the Securities and Exchange Commission and the U.S. Justice Department and several shareholder lawsuits. As a result, the company will have to restate earnings by as much as $12 billion.

In the area of subordinated debt, Fannie and Freddie have committed to a program of issuing subordinated debt and will submit an issuance plan for review by OFHEO every six months, the regulator said.

Each enterprise will maintain, at 4 percent or more, the ratio of its qualifying subordinated debt plus core capital to the sum of its assets and .45 percent of its outstanding net mortgage-backed securities. Subordinated debt with remaining maturity of less than five years will receive partial credit.

With regard to liquidity management and contingency planning, OFHEO will oversee strong liquidity positions and adequate contingency planning at the enterprises.

In the area of public disclosures, OFHEO will review public disclosure regarding subordinated debt, liquidity management, interest-rate risk, credit risk and a risk rating by a nationally recognized rating agency. In particular, OFHEO will seek to have the enterprises more closely conform their duration measures.

OFHEO's examination teams will supervise implementation of the agreements as part of their ongoing regulatory responsibilities.

In December 2004, Fannie Mae replaced Franklin Raines, its chairman and CEO, who announced he was taking early retirement, and Fannie Mae's chief financial officer, Timothy Howard, also resigned.

Freddie Mac experienced a management shakedown in 2003 when accounting irregularities surfaced. The company has since restated several past years' earnings amounting to approximately $5 billion. And OFHEO fined the company $125 million.

OFHEO continues to investigate Fannie Mae's accounting practices.

Copyright 2005 Inman News

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