Freddie Mac to Spend $200 Million to Address Accounting Issues

Freddie Mac officials testified before the House Financial Services subcommittee on government-sponsored enterprises and let lawmakers know that the agency expects to spend upwards of $200 million to correct accounting problems that led to a $5 billion restatement of earnings last year.

Freddie Mac, the nation’s No. 2 mortgage finance company, replaced its top three executives last June in the wake of an accounting investigation. The company’s president was accused of not fully cooperating with auditors reviewing the company’s 2000-2002 financial statements.

In December, Freddie Mac has agreed to pay a $125 million civil fine to settle federal regulators’ allegations of mismanagement at the mortgage finance giant that is blamed for the $5 billion understatement of earnings.

The Office of Federal Housing Enterprise Oversight (OFHEO), which regulates Freddie Mac and the larger Fannie Mae, also released a report in December saying that weaknesses existed in every aspect of Freddie Mac's accounting process. The report cited "a pattern of inappropriate conduct and improper management of earnings" at the company. It also said that Freddie Mac "disregarded accounting rules, internal controls, disclosure standards, and ultimately, the public trust in pursuit of steady earnings growth."

Freddie Mac’s Chief Financial Officer Martin Baumann testified last Wednesday that the $200 million in internal fixes is in addition to the $125 million fine it has already paid to OFHEO. Baumann said the company paid $100 in remedy actions in 2003 and expects to spend at least that much in 2004.

OFHEO Director Armando Falcon, who also testified at the hearing, said his agency will continue to levy extra surcharges against Freddie until the company is able to file timely financial disclosure statements, Dow Jones Newswires reported.

"Until remediation efforts have taken full effect, Freddie Mac remains exposed to substantial management and operations risk," Falcon testified.

Dow Jones reported that to account for unforeseen management risks, OFHEO can impose a surcharge of up to 30 percent on Fannie Mae or Freddie Mac’s minimum capital requirements, which stood at just under $24.1 billion for Freddie in the third quarter of 2003. Freddie already had on hand roughly $4.1 billion in excess capital at that time, which didn't reflect changes in the company's capital levels due to the restatement. Falcon said his agency will announce the amount of the capital surcharge this week.

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