Fannie, Freddie face probe; 2007-08 activities under scrutiny

WASHINGTON — Adding to their woes, mortgage-finance giants Fannie Mae and Freddie Mac are facing a federal grand-jury investigation into their accounting practices.

The mortgage-finance companies said Monday that a federal grand jury in New York is investigating their accounting, disclosure and corporate-governance issues.

Fannie and Freddie said they received subpoenas Friday from the U.S. Attorney's Office in Manhattan as well as requests from the Securities and Exchange Commission (SEC) that they preserve documents. Fannie Mae and Freddie Mac were taken over by the government earlier this month as their mounting defaults and foreclosures threatened the entire mortgage market.

The government investigation focuses on activities starting in 2007, Freddie Mac said in a statement.

Critics have long questioned the companies' bookkeeping. Last November, for example, a Fortune magazine story said new accounting procedures at Fannie Mae masked potential losses on bad loans.

And several years ago, both Fannie and Freddie were forced to restate billions in earnings after federal regulators discovered accounting irregularities at both companies.

The scandals led to the replacement of the companies' top executives. Freddie Mac's former CEO, Gregory Parseghian, was ousted in December 2003. Fannie CEO Franklin Raines and Chief Financial Officer Timothy Howard were swept out of office a year later.

Both companies said Monday they would cooperate fully in the investigations, but their spokesmen declined to comment. Representatives of the SEC and Justice Department also declined to comment.

Three weeks ago, the government seized control of Fannie Mae and Freddie Mac, the two biggest U.S. mortgage-finance companies, with a rescue plan that could require the Treasury Department to inject as much as $100 billion into each to keep them afloat.

A spokeswoman for the Federal Housing Finance Agency, which controls the companies, said the housing agency "will work with the companies to assure a smooth and efficient process and will work with the government agencies as they undertake their inquiries."

Law-enforcement officials said last week the FBI is looking at potential fraud by Fannie, Freddie and insurer American International Group (AIG). Additionally, a senior law-enforcement official said failed investment bank Lehman Brothers also is under investigation.

The inquiries will focus on the financial institutions and the individuals that ran them, the senior law-enforcement official told The Associated Press last week.

Officials said the new inquiries bring to 26 the number of companies connected to the mortgage crisis under investigation during the past year.

Over the past year, as the housing market cratered, the FBI has opened a wide-ranging probe of companies across the financial-services industry, from mortgage lenders to investment banks that bundle home loans into securities sold to investors. FBI Director Robert Mueller has said the FBI's hunt for culprits in the U.S. mortgage crisis focused on accounting fraud, insider trading and failure to disclose the value of mortgage-related securities and other investments.

Additionally, the FBI is investigating failed bank IndyMac Bancorp for possible fraud. Countrywide Financial, formerly the largest U.S. mortgage lender and now owned by Bank of America, is also under scrutiny.