by Amy Lillard
We've all heard of Fannie Mae and Freddie Mac, in various tones and across different topics. But who are they? How do they operate in the world of mortgages, money, and home ownership?How are they different from other banks and lenders? In a series of articles, we examine the good, the bad, and the curious about government-sponsored enterprises, otherwise known as Fannie Mae and Freddie Mac.
Freddie Mac, organized by the government and charged with a public mission, is unique. It works within the secondary mortgage market with the express goal of offering more families the opportunity to own homes.
Just like Fannie Mae, you might suspect that a company with such a pedigree would be free of taint. However, just like Fannie Mae, Freddie Mac is a privately owned company, where the need for profit sometimes causes dangerous and illegal actions.
The trouble began for Freddie Mac in early 2003. The company's accounting firm announced that the previous firm (Arthur Anderson, reeling at the time from the Enron scandal) had misclassified figures. The company announced they would restate earnings for the past several years. They couched the announcement in suggestions that the recalculation would increase profits rather than hurt them.
However, later in 2003 the investment world and business leaders were shocked to learn that Freddie Mac had fired President David Glenn, and accepted the resignations of the CEO and CFO. The official word was the leaders were ousted after failing to comply with the auditing process, and at company request.
That's when the oversight agency for Freddie Mac, the Office of Federal Housing Enterprise Oversight, jumped in. They were joined by the U.S. Securities and Exchange Commission to look into the accounting inconsistencies, and the U.S. House proceeded to conduct hearings on securities and criminal investigations.
Analysts and journalists agreed that the news of deep-seeded trouble within Freddie Mac quickly became not just a business issue but also a political one. Politicians in support of stricter regulation for the GSEs seized upon the news to show what they claimed was a loosely regulated financial marketplace with trillions at stake. Government groups also were quick to pounce on what they deemed as the truly volatile nature of mortgage-backed securities traded by Freddie Mac and Fannie Mae, which are not backed by the government but are perceived to be, and represent an extraordinary amount of debt and capital for the mortgage market and the economy.
After the events of 2003, including the accounting audits, management shake-ups, and government hearings, Freddie Mac was hurting. The crisis revealed problems so deep Freddie Mac didn't resume issuing financial reports for several years. Under new management, the company took a hit in earnings, and began an overhaul of internal controls and accounting systems. More punishing was the drop in public esteem for the company. The company has intentionally taken on even more public initiatives to improve housing in America to remove the taint of scandal.
Soon after the Freddie Mac scandal broke, companion company Fannie Mae underwent its own scandal. The two GSEs and their legal troubles have resulted in greater government oversight, and new requirements to focus on their public mandates. All that work to make housing affordable for low-income homebuyers and other targeted groups? Done in part to comply with government regulations, requiring these actions as amends for corporate scandal.
Should Freddie Mac's long history of public effort be erased by corporate robbery? Read our continuing series on the major initiatives undertaken by the company to house America, as well as an analysis of the company's role in our economy and housing market today.
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