Add Fannie Mae executives to the long list of names who came to Washington, D.C., to do good – and stayed on to do well. Now that Fannie and her sibling Freddie Mac are joined under the harsh light of financial scandal, Congress needs to tighten regulation of both agencies.
Fannie Mae is a nickname for the Federal National Mortgage Association, while Freddie Mac is its smaller rival, the Federal Home Mortgage Corporation. Both have operated since 1968 as government-sponsored enterprises – an economic hybrid that means they are privately owned by stockholders but enjoy financial favors from the federal government, including access to low-cost credit through the U.S. Treasury and exemption from state and local income taxes.
These favors allow both companies to borrow money at below-market rates and buy home mortgages from banks and other financial institutions. By buying existing mortgages and reselling them to other investors, the two companies keep primary lending institutions liquid and able to write new mortgages. With such a solid market for old mortgages, the U.S. has been able to achieve unprecedented high levels of home ownership.
Yet as a scathing 340-page report released last Tuesday by the Office of Federal Housing Enterprise Oversight made clear, Fannie Mae executives abused their privileged status by inflating earnings by a total of $10.6 billion over six years so the executives could collect hundreds of millions of dollars in bonuses. A similar scandal broke over Freddie Mac in 2003 when the company was found to have overstated its earnings by $5 billion.
In partial atonement for its misdeeds, Fannie Mae has agreed to a settlement that will pay $400 million in restitution – $50 million to the U.S. government and $350 million to a fund for its own defrauded shareholders. Fannie Mae should move to recoup some of the bonuses given to former Chairman Franklin Raines and other former executives. Raines received $90 million from Fannie Mae between 1998 and 2003, including $52 million in bonuses keyed to earnings targets the company hit, at least in part, by “deliberately and intentionally” manipulating its accounting, according to the report. Raines disputes that, but has accepted responsibility nonetheless.
Recovering undeserved bonuses from executives may be the easy part. The hard part will be for Congress to ensure that in tightening financial reins over the two companies it doesn’t also cripple their vital role in enabling the American dream of home ownership. Punish the wrongdoers, not future home buyers.
