The mortgage finance company Freddie Mac said Tuesday that it will lower first and second quarter income by $220 million because of a computer error. Total profit for the period will be adjusted to $1.4 billion from $1.6 billion.
The error arose from a flaw in a computer system, used by Freddie Mac since 2001, that overstated income from interest on securities backed by adjustable rate mortgages, Michael Cosgrove, spokesman for the company said, according to the Washington Post.
The problem in the system did not become apparent earlier because Freddie Mac had not been buying these securities in large quantities until recently. The company increased its holding of these securities over the past year by 35 percent, to $236 billion from $175 billion, the Post reports. Company officials noted that the error was only 1 percent of the $36.1 billion of capital on hand that the company is required to maintain.
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Although the errors dates from 2001, Freddie has decided to book the revisions in the current year, the New York Times said, after consulting with their accounting firm PricewaterhouseCoopers. Overstated income resulting from the software problem in th first half of 2005 alone was $33 million for the first quarter and $51 million for the second quarter, the Wall Street Journal reports.
The revisions to the first and second quarter earnings will delay issuance of the third quarter earnings statement. Martin Baumann, Chief Financial Office of the company said that during the fourth quarter, Freddie Mac “will be looking at other computer applications to ensure there aren’t other programming functionality issues in some other legacy systems,” before the company issues fourth quarter earnings, the Wall Street Journal reports. Officials expect the company to issue timely statements no later than March 2006.
The error may delay Freddie’s plans to register with the Securities and Exchange Commission (SEC), Mr. Cosgrove said, according to the Post.
Former chief accountant for the SEC Lynn E. Turner told the Post that the error indicates the company did not adequately test its system when it was first installed and that the amount of money involved was significant. “What they are saying is, “We just aren’t worried about an error until it reaches $220 million.” By then the number is so big it impacts shareholders,” he said.
“We have made enormous strides in fixing our financial infrastructure, but, as we have previously disclosed, the effort is not complete,” Baumann said in a statement, according to the Washington Business Journal.