Legislation Proposed to Reform Freddie Mac

The first legislation in response to mortgage giant Freddie Mac’s leadership and accounting problems would prescribe tighter regulation and a new supervisory system for both Freddie Mac and its sis- ter government-sponsored company, Fannie Mae.

The measure proposed by Rep. Richard H. Baker (R-La.), the most outspoken congressional critic of the two publicly traded companies, would abolish the Office of Federal Hous- ing Enterprise Oversight, the agency of the Department of Housing and Urban Development that supervises them.

The oversight office, which would be eliminated a year after enactment, lacks the money and authority to do the job, investors and legislators said.

The two government-chartered companies, which own or guarantee 42% of the $7-trillion U.S. mortgage market, overwhelm the agency in size as well as political clout, the investors said. The agency’s $27.3-million budget last year was roughly equivalent to the profit Freddie Mac and Fannie Mae generated every 23 hours.

Baker’s bill would give regulation and greatly expanded powers to the Treasury Department division that oversees savings-and-loan companies.

Both Fannie Mae and Freddie Mac have come under regulatory scrutiny since June 9, when Freddie Mac said it ousted its three top officers amid a restatement of earnings for the last three years.

Fannie Mae’s shares fell Monday after the New York Times reported that the company may have suffered a big loss last year that was obscured by the complexity of its accounting. Fannie Mae stock fell $1.88 to $67.97 on the New York Stock Exchange.

Fannie Mae, which makes money on the difference between its borrowing costs and the returns on mortgages it buys from banks, may have lost billions of dollars last year when interest rates fell based on “fair value” balance sheet accounting, the newspaper reported.

“Fair value is a snapshot in time, and it’s more valid if you’re going to liquidate the company,” said Craig Smith, an analyst at David L. Babson & Co. in Boston, which owned 142,034 Fannie Mae shares as of the end of March.

But Fannie Mae didn’t break any accounting rules, the newspaper said.

A Fannie Mae spokesman told Bloomberg News that this had been reported in the company’s annual financial statement filed with the Securities and Exchange Commission.

The federal housing oversight agency will be fighting for its life in a hearing this week before the House Financial Services subcommittee chaired by Baker.

“We’re not placing a lot of confidence in [the agency], because we think they are out-gunned by the companies they are regulating -- politically and economically,” said Kevin Barry, a managing director of global fixed income at TimesSquare Capital Inc. Management in New York, which invests $44 billion.

The agency “doesn’t have a strong enough mandate, in part because Fannie Mae and Freddie Mac helped write the legislation” creating it, said Rep. Christopher Shays (R-Conn.).

Associated Press and Bloomberg News were used in compiling this report.