By Elana Schor - 05/24/06 12:00 AM EDT
Fannie Mae’s government regulator yesterday released its hotly anticipated report on management failures at the housing-finance giant, alleging that Fannie used its lobbyists to interfere improperly with the investigation and slice the regulator’s budget.
Lobbyists still digesting the 340-page report from the Office of Federal Housing Enterprise Oversight (OFHEO) were optimistic that the agency’s harsh criticism of Fannie would give a shot in the arm to stalled negotiations on legislation creating a new regulator for government-sponsored enterprises, or GSEs. Fannie will pay $400 million in fines to OFHEO and the Securities and Exchange Commission, more than double the amount that its fellow GSE, Freddie Mac, paid in 2003.
Fannie also has agreed to act on a series of OFHEO recommendations, including review and possible termination of individual executives mentioned in the report. OFHEO’s conclusion that Fannie’s “growth should be limited” faces an uncertain fate, however, as partisan wrangling and House-Senate differences so far have prevented Congress from agreeing on GSE regulatory reform this year.
“Obviously people have been waiting for the report, and we would hope it would provide impetus for moving legislation,” said Floyd Stoner, executive director of congressional relations for the American Bankers Association.
Still, Stoner and others on K Street were hesitant to predict that OFHEO’s findings would influence the makeup of whatever GSE bill eventually passes. The House approved its version in October, but the Senate has yet to take up the GSE measure that cleared the Banking Committee in July.
“Both [House and Senate] bills envision a strong regulator for the GSEs,” Stoner said. Dan Berger, senior vice president of government relations at the National Association of Federal Credit Unions, echoed Stoner’s call for congressional action despite the dwindling number of legislative days remaining in this year’s session.
“Fannie Mae has clearly made and continues to make numerous and substantial changes,” Berger said. “It is important for Congress to pass a fair and meaningful GSE bill this year.”
The White House has backed the Senate’s language immediately limiting the GSEs’ investment portfolios, while the House bill merely gives the new regulator authority to impose those limits.
Kurt Pfotenhauer, senior vice president of government affairs at the Mortgage Bankers Association, said the report “just adds color commentary to what has been a fairly well-established fact pattern” of impropriety at Fannie. “Since portfolio is a sticking point on passage of the Senate bill, I’m trying to figure out” whether OFHEO’s language on portfolios might help lawmakers reach a consensus.
OFHEO asks for an immediate freeze in Fannie’s portfolio, suggesting that Democratic senators reluctant to support the limits proposed by Banking Committee Chairman Richard Shelby (R-Ala.) could have less room for objection.
“You will see everybody saying, ‘It’s time to move,’” said Mike House, executive director of FM Policy Focus, which lobbies for the strongest possible GSE reform. “After the Enron debacle, they passed legislation after 18 months, and it’s been over two years now” since corporate misdeeds at the GSEs first came to light, House added. “Congress hasn’t moved yet, and this is much larger than Enron. … The key thing is to work out something on portfolios, and I think that can be [done].”
The report directly assails Fannie’s lobbying activities, stating that top executives at the GSE asked lobbyists to try to derail OFHEO’s work by leaning on congressional allies for an investigation of the investigation.
That oversight inquiry into OFHEO, conducted by the inspector general at the Department of Housing and Urban Development (HUD), was requested by Sen. Kit Bond (R-Mo.), who heads the Appropriations subcommittee of jurisdiction. Congress later initiated two other HUD investigations of OFHEO, and the report states that Fannie lobbyists directly wrote the legislative language for the final one.
Bond spokesman Robert Ostrander said the HUD inspector general’s report was productive and necessary.
It “uncovered serious issues concerning OFHEO’s conduct and effectiveness. … It’s not surprising OFHEO would find oversight by the HUD IG painful, but Senator Bond hopes that OFHEO has learned important lessons from the report, which will help it become a true watchdog,” Ostrander said.
John Dalton, president of the Financial Services Roundtable’s housing-policy council, said the lobbying missteps were among the “most egregious” charges in the report, which details $10.6 billion in income overstatements made by Fannie.
“The contact by the GSE to the Hill to affect appropriations for OFHEO because [Fannie] didn’t like how they were going about their job … they currently don’t have the independence they need, nor does OFHEO have the necessary independence for a regulator to be effective,” Dalton said.
The OFHEO report also chastises Kenneth Duberstein, head of the influential Duberstein Group lobbying shop and a former chief of staff to President Reagan. Duberstein remained on Fannie’s board of directors while lobbying on its behalf, and the GSE disclosed his status as a non-independent director.
But Duberstein attended meetings with independent directors, including some addressing compensation for resigned Fannie CEO Franklin Raines, over the objections of outside consultants, according to the OFHEO report. As part of its agreement with the regulator, Fannie has agreed to an external review of all its personnel controls, including in the government-relations arm.
Duberstein’s office referred an inquiry about the contents of the OFHEO report to Fannie Mae. The company pointed to corporate governance rules for the New York Stock Exchange, where Fannie shares are publicly traded, which state that “discussion of CEO compensation with the board generally” is permissible.
The National Association of Home Builders, a historic ally of Fannie Mae that has pushed for giving the GSEs more financial freedom, is still examining the report and is unable to comment at this time, according to a spokesman. The National Association of Realtors also declined to comment at the present time, its spokeswoman said.