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Last Updated: Monday, 9 June, 2003, 16:47 GMT 17:47 UK
Heads roll at US mortgage giant
Freddie Mac backs one in six US homeowners

Freddie Mac, the second-biggest US mortgage lender, has replaced its entire top management amid regulatory concern over its internal corporate ethics.

The corporation, which backs one in six US homeowners, said its president and chief operating officer had not cooperated with auditors, and that other managers had not behaved with complete correctness.

The federal regulators, the Office of Federal Housing Enterprise Oversight (OFHEO), said the management shake-up "only goes part of the way toward correcting serious problems".

OFHEO has deployed a special team to investigate the new audit of Freddie Mac's results.

Freddie Mac, along with fellow lender Fannie Mae, is crucial to the US financial system, because of the billions of dollars-worth of bonds it issues.

'More than meets the eye'

Freddie Mac was asked to restate its past earnings in January, after a new auditor questioned the way it worked out its results.

Until now, that process had been relatively uncontroversial.

"This is bad," said Paul Miller, an analyst at Friedman, Billings, Ramsey bank.

"We've always felt that there was more here than met the eye, and it turns out that's exactly what it is."

Earlier this year, Federal Reserve chairman Alan Greenspan expressed concern that Freddie Mac and Fannie Mae may not have adequate capital.

Smoothing out

OFHEO said that Freddie Mac was not financially unsound, but that some of its staff had behaved in a way that was "inconsistent with OFHEO's expectation of prudent management practices".

It is still not entirely clear what form malpractice took, but there has been widespread concern at the way Freddie Mac smoothed out its results over time, using profits in one quarter-year to balance losses in another.

Overall, Freddie Mac has not been performing badly: US demand for mortgages is at a record high.

But the firm has been hit by the unprecedented volatility of the industry, forcing it to seek ways of making results more predictable, quarter by quarter.

Central role

Freddie Mac and Fannie Mae were created by Congress in the late 1960s to buy home loans from banks and other lenders to supply ready cash.

According to Mr Greenspan, their position is odd because many investors mistakenly think they are backed by the government.

They buy mortgages from lenders to keep in their portfolios and package others for sale on Wall Street.

Greenspan warns of housing slowdown
04 Mar 03  |  Business

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