Freddie’s Regulator Tells of Lapses
The regulator of beleaguered mortgage buyer Freddie Mac on Thursday blamed lapses in integrity at the company and its outside law firm for keeping the government in the dark about an accounting scandal.
“There was a breakdown in integrity at a couple of levels -- a breakdown in integrity in top management and a breakdown in integrity in the outside counsel,” Armando Falcon, director of the Office of Federal Housing Enterprise, told the Senate Banking Committee.
But senators of both political parties questioned the agency’s ability to oversee Freddie Mac and mortgage finance rival Fannie Mae, saying the regulator should have detected accounting problems earlier.
The agency “was in the dark, perhaps out of their depth, and obviously didn’t know what was going on at Freddie Mac,” said committee Chairman Richard C. Shelby (R-Ala.).
Falcon, a Clinton appointee whose successor’s confirmation hearing is next week, defended his role, saying the companies were financially sound and the agency would have known if there had been a risk of default.
Lawmakers have proposed giving the Treasury Department responsibility for supervising Freddie Mac and Fannie Mae.
Shares of Freddie Mac fell $1.13 to $52.17 on Thursday on the New York Stock Exchange.
Freddie Mac last month replaced its top management and said it had manipulated its accounting to smooth its earnings.
Regulators, law enforcement officials and lawmakers have announced probes into the restatement that the company had first warned in January was coming.
Falcon said the law firm Freddie Mac’s board hired to investigate the restatement “had not been fully forthcoming” in a May 27 exchange. He said the lack of candor contributed to his decision to start his own inquiry.
The law firm, Baker Botts, disputed Falcon’s comments.
“At no time has any representative of [the regulatory agency] expressed any concern to us or to any member of our firm ... with respect to our candor and cooperation,” Baker Botts lawyer James Doty said in a letter to lawmakers.
Senators raised their most pointed concerns to date about supervision of Freddie Mac on Thursday and some endorsed U.S. Treasury oversight of the two companies, which owned or had guaranteed 44% of the $6.7 trillion in U.S. mortgage debt as of late last year.
“None of us are very happy on either side of the aisle with what has happened with oversight,” Sen. Charles E. Schumer, a New York Democrat said.
Falcon said his agency had the expertise to evaluate Fannie Mae and Freddie Mac’s finances but, with a budget of about $32 million, was underfunded.
Freddie Mac and rival Fannie Mae are shareholder-owned companies chartered by Congress to help expand U.S. homeownership. They buy mortgages from lenders and package them as securities or hold them in their portfolios.
