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2006-12-07
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Fraud at Fannie Mae

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In 2004, the Office of Federal Housing Enterprise Oversight released a report (pdf) alleging gross financial overstatements at Fannie Mae as a result of glossing over losses to pad executive bonuses. The government sponsored mortgage company was fined $400 million and more than thirty executives, including the CEO, are subject to disciplinary action and termination. Now official, the two year audit of records between 1998 and 2004 has concluded $6.3 billion in overstated earnings. SEC Chairman Christopher Cox said, Fraudulent financial reporting cheats investors of their savings. Those whose actions led to the accounting fraud you've heard described today will be vigorously pursued."

Fannie Mae is in the business of ensuring that American's have the money to purchase homes. This is accomplished by buying mortgages from local lenders and then repacking them as mortgage backed securities offered to investors. As such, lenders have a steady cash flow to loan to buyers and Fannie Mae makes money from investors who assume there is low risk of the mortgages defaulting. Even if the large numbers of loans default, Fannie Mae is backed by government tax dollars. The problems arose because Fannie Mae has a near limitless influx of cash combined with an exemption from reporting to the SEC and from paying taxes, which essentially allowed creative bookkeeping.


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