Caught up in a whirlwind of controversy, two of Fannie Mae's top executives have exited, and regulators now say the mortgage giant is significantly undercapitalized.
Fannie's board of directors announced Tuesday the retirement of chairman and chief executive Franklin D. Raines and the resignation of chief financial officer J. Timothy Howard.
Vice chairman and chief operating officer Daniel Mudd succeeded Raines as the interim chief executive and board member Stephen Ashley will fill the chairman role, according to the announcement. Executive vice president Robert Levin has replaced Howard as the interim chief financial officer.
The resignations represent a major victory for the Bush administration -- which has sought to reign in Fannie and smaller cousin Freddie Mac. The two publicly traded government sponsored housing enterprises were chartered by the U.S. Congress to provide liquidity to the residential mortgage markets. Raines, who was part of the Clinton administration, has wielded enormous influence over Fannie-related issues on Capitol Hill through a team of politically-savvy and well-connected lobbyists.
Fannie's board also announced that the audit committee dismissed KPMG as its independent auditors and has started a search for a replacement.
"Fannie Mae's Board of Directors takes these steps today to move the company forward to serve its critical mission in a safe and sound manner," said Ann Korologos, a board director, in the announcement.
The resignations and reassignments follow a series of accounting practices examinations by Fannie's regulator, the Office of Federal Housing Enterprise Oversight, and by the Securities and Exchange Commission.
"I previously stated that I would hold myself accountable if the SEC determined that significant mistakes were made in the Company's accounting," Raines, whose photo still appeared on the announcement at the company's Web site, said Tuesday. "Although, to my knowledge, the Company has always made good faith efforts to get its accounting right, the SEC has determined that mistakes were made. By my early retirement, I have held myself accountable."
Last month, Fannie missed the deadline for filing its Form 10Q with the SEC -- attributing the crucial delay to its independent auditors' inability to complete the review of unaudited financial statements. It also said it presented its views to the SECs Office of the Chief Accountant and that it would "modify its accounting, if necessary, to comply with the SEC's views."
On Dec. 15, the SECs chief accountant said an agency review found that Fannie's accounting practices from 2001 to mid-2004 violated SFAS 133 and SFAS 91 accounting standards for prepaid loan adjustments and for derivatives and hedging activities. The SEC accountant ordered the mortgage giant to restate financial activities relating to those matters.
On Tuesday, OFHEO announced it classified Fannie as "significantly undercapitalized under OFHEOs capital standards" as of Sept. 30. The regulator said the SECs order requiring Fannie to restate accounting treatments related to SFAS 133 disallowed hedging treatments and resulted in "an estimated $9 billion cumulative reduction in core capital as of September 30, 2004 as disclosed by Fannie Mae. This capital level places Fannie Mae below its minimum capital requirement and results in a classification of significantly undercapitalized."
OFHEO has directed Fannie to provide it with a capital restoration plan to bring core capital into compliance with the minimum capital requirement plus a targeted surplus of 30 percent over the minimum capital requirement level, as part of the agreement Fannie made with OFHEO on Sept. 27.
"I commend the Board for [Tuesday's] action to address the serious issues raised in OFHEO's findings," Falcon said in a written statement. "We are encouraged that the Board's announcement signals a new culture and a new direction for Fannie Mae. OFHEO is working closely with the Board to promptly address the elements of a capital restoration plan and other important reforms."
OFHEO said it will work with Fannie on the capital plan and its implementation.
The undercapitalization does not refer to Fannie's critical capital level, which remains above the required threshold and continues to meet the risk-based capital requirement, OFHEO said.
Fannie said it is "mindful of our obligations under the agreement with OFHEO, we are working diligently in cooperation with OFHEO to comply with the agreement, and we are making progress on implementing its terms."
Fannie's accounting woes sprung after Freddie's accounting scandal last year, which led to the firing of top executives. Investigations followed after Fannie had to restate $1.1 billion of its stockholder equity last November for miscalculating mortgage commitments.