Grand jury probes Fannie, Freddie

Adding to their woes, mortgage finance giants Fannie Mae and Freddie Mac are facing a federal grand jury investigation into their accounting practices.

The mortgage-finance companies said Monday that a federal grand jury in New York was investigating accounting, disclosure and corporate governance issues at Washington-based Fannie and McLean, Va.-based Freddie.

Fannie and Freddie said they received subpoenas Friday from the U.S. attorney’s office in Manhattan as well as requests from the Securities and Exchange Commission that they preserve documents. Fannie and Freddie were taken over by the government this month as their mounting defaults and foreclosures threatened the entire mortgage market.

The government investigation focuses on activities starting in 2007, Freddie said in a statement.

Critics have long questioned the companies’ bookkeeping. In November, for example, a Fortune magazine story said new accounting procedures at Fannie masked potential losses on bad loans.

And several years ago, both Fannie and Freddie were forced to restate billions of dollars in earnings after federal regulators discovered accounting irregularities at both companies.

The scandals led to the replacement of the companies’ top executives. Freddie’s former chief executive, Gregory Parseghian, was ousted in December 2003. Fannie CEO Franklin Raines and Chief Financial Officer Timothy Howard were swept out of office a year later.

Both companies said Monday that they would cooperate fully in the investigations, but their spokesmen declined to comment. Representatives of the SEC and Justice Department also declined to comment.

Three weeks ago, the government seized control of Fannie and Freddie, the two biggest U.S. mortgage-finance companies, with a rescue plan that could require the Treasury Department to inject as much as $100 billion into each of the companies to keep them afloat.

A spokeswoman for the Federal Housing Finance Agency, which controls the companies, said the housing agency “will work with the companies to assure a smooth and efficient process and will work with the government agencies as they undertake their inquiries.”

Law enforcement officials said last week that the FBI was looking at potential fraud by Fannie, Freddie and insurer American International Group Inc. Additionally, a senior law enforcement official said failed investment bank Lehman Bros. Holdings Inc. also was under investigation.

The inquiries will focus on the financial institutions and the individuals who ran them, the senior law-enforcement official said.

Officials said the new inquiries bring to 26 the number of companies connected to the mortgage crisis under investigation over the last year.

As the housing market cratered over the last year, the FBI has opened a wide-ranging probe of companies across the financial services industry, including mortgage lenders and investment banks that bundle home loans into securities sold to investors.