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Fannie Mae: FHFA Accounting Fraud Chorus Deepens

Fannie Mae: FHFA Accounting Fraud Chorus Deepens by Glen Bradford

The federal takeover of Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) refers to the placing into conservatorship of government-sponsored enterprises Fannie Mae and Freddie Mac by the U.S. Treasury in September 2008. It was one of the financial events among many in the ongoing subprime mortgage crisis.

Federal takeover of Fannie Mae and Freddie Mac

On September 6, 2008, the director of the Federal Housing Finance Agency (FHFA), James B. Lockhart III, announced his decision to place two Government-sponsored enterprises (GSEs), Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corporation), into conservatorship run by the FHFA.

Early Reports of Accounting Fraud Resurface

Bethany McLean wrote a book Shaky Ground where she dives into the strange saga of the U.S. mortgage giants that were created by Congress to serve the American Dream of homeownership. According to her, her quest begins with her own desire to better understand why the government seems to want them dead. She highlights in her book where the calls for this new type of accounting fraud surfaced.

Normally accounting fraud involves the overstatement of assets. In this case, however, the fraud is in understating assets in order to prevent non-governmental stakeholders from participating in the good business that Fannie and Freddie facilitate in capital markets. Bethany's research suggests Fannie and Freddie needed much less than they were forced to take:

$10B is a lot less than $187.5B that they are on the hook for or the $132.2B that they actually were forced to borrow. Meanwhile another accounting analysis suggests that Fannie and Freddie Mac didn't need a dime, but the government did.

HousingWire's Trey Garrison - A FannieGate Hero

Apparently Trey Garrison is the go to guy for GSE accounting fraud analysis when it needs to be spread like wildfire. Mike Ciklin and Adam Spittler put together the first real forensic accounting fraud analysis that demonstrated that the firms were making massive cash profits while the government was forcing them to report massive losses and a new report that has just come out suggests that this was done solely to disenfranchise non-government stakeholders. The original report can be found here. My coverage of it can be found here. My explanation for how accounting...