Monday, August 19, 2013

Fannie Mae, Freddie Mac Inflating Earnings And Ability To Pay Dividends To US By Not Following Financial Institution Accounting Practices Of Writing Off Delinquent Loans

Based on earnings that do not follow financial institution accounting practices, Fannie Mae and Freddie Mac are reporting high earnings and paying $10.2 and $4.4 billion, respectively, in dividends to the US government. Without an accurate accouting accounting statement, are we sure the two GSE's can afford to make the payments?

From Bloomberg, "Fannie Mae, Freddie Mac Ignoring Write-Offs, Report Says" by Clea Benson & Cheyenne Hopkins:
Fannie Mae and Freddie Mac, which have reported record profits after a taxpayer bailout, are ignoring billions of dollars in potential losses on overdue loans as they take three years to adopt a new accounting system, a government auditor said in a letter made public today.

The accounting change should be made immediately and could have a material impact on the companies’ finances, according to the Aug. 5 letter to Federal Housing Finance Agency Acting Director Edward J. DeMarco from Steve Linick, the regulator’s inspector general.

"Three years appears to be an inordinately long period," Linick wrote in the letter posted on his office’s website today.
“A substantial percentage of the GSEs’ recent earnings and the subsequent dividend paid to Treasury was a result of decreasing loan-loss reserves,” said Tim Rood, a former Fannie Mae (FNMA) executive and now managing director at Collingwood Group LLC, a financial services consulting firm based in Washington. "If the new accounting standard being imposed on them stopped or slowed the release of those reserves, it would have a direct and negative effect on the amount of dividend payments."

Delinquency Deadline

Fannie Mae and Freddie Mac buy mortgages from lenders and package them into securities on which they guarantee principal and interest payments. The FHFA, which oversees Washington-based Fannie Mae and McLean, Virginia-based Freddie Mac, ordered the companies in April 2012 to start writing off all loans delinquent for at least 180 days, a standard practice for regulated financial institutions.

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