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Congress gets power to subpoena Fannie Mae

By James Tyson and Bill Arthur
Bloomberg News

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Rep. Michael Oxley of Ohio, a Republican and chairman of the House Financial Services Committee, won approval from the panel to require Fannie Mae to provide documents and testimony for an Oct. 6 hearing on findings that the company used improper "cookie jar" reserves and deferred expenses to smooth earnings and meet executive bonus targets.

The power of subpoena gives the committee "the tools we need to continue our oversight of Fannie Mae," Oxley said at a committee meeting.

Fannie Mae Chief Executive Officer Franklin Raines plans to testify at the hearing, said Chuck Greener, a spokesman for the Washington, D.C.-based, government-chartered company.

Fannie Mae shares dropped 15 percent last week, erasing about $11 billion of market value, after its federal regulator, the Office of Federal Housing Enterprise Oversight (OFHEO), released its report on the company's accounting. The shares fell 71 cents to $66.25 yesterday.

"We heard there was some reluctance on the part of Fannie Mae officials" to provide information to the panel, said Rep. Barney Frank of Massachusetts, the senior Democrat on the committee. "This is an important issue that they need to come talk to us about."

Congress created Fannie Mae in 1938 to increase financing for home mortgages. The company makes money on the difference between its costs to borrow in the bond market and the returns on mortgages it buys from lenders. It also charges lenders a fee for guaranteeing credit on mortgage bonds.

Fannie Mae and Freddie Mac, its smaller rival, own or guarantee almost half the $7.3 trillion mortgage market. After the federal government, Fannie Mae is the second biggest debtor in the U.S., with $942 billion as of July 31.

Oxley's committee plans to hear testimony from a former Fannie Mae employee who expressed concern last year about how the company accounted for expenses in its mortgage purchases.

Oxley and Frank also have asked the House Appropriations Committee to increase funding for OFHEO for fiscal 2005 beginning Oct. 1 beyond the agency's $59.2 million request.

Roger Barnes, who left his post in the controller's department of Fannie Mae in November, raised concern that the company was making alterations in expense accounting in order to ensure that final results agree "with forecasted amortization" expenses. His concern was documented in minutes of an Aug. 8, 2003, meeting disclosed last week in the report by OFHEO.
 
Fannie Mae, in a move that will reduce its earnings growth, said Monday that it will set aside more capital and "recalculate"' how it defers expenses and accounts for hedging transactions designed to protect its $895 billion mortgage portfolio from swings in interest rates.

Fannie Mae's directors are "defending" Chief Financial Officer J. Timothy Howard and other top executives rather than subjecting them to "complete, thorough and unbiased review," Rep. Richard Baker of Louisiana, the second most senior Republican on the committee, said in a letter to the directors. A copy of the letter was released by Baker's office yesterday.

"Congress must have confidence there will be true accountability for those who either ordered the alleged violations or allowed such abuses to flourish," Baker said.

Ann Korologos, the Fannie Mae director handling the response to the allegations, said in a Sept. 27 statement that Raines "is handling this situation just as you would expect a first-class CEO to do — with honor and absolute integrity."

Raines' "strong leadership and his commitment to the company's mission are appreciated by every member of the board," she said. Raines, a Seattle native and graduate of Franklin High School, has headed Fannie Mae since January 1999.