WASHINGTON, D. C. — "Freddie Mac and Fannie Mae play an integral role in the national housing market. Through their financing activities in the secondary mortgage market, the Enterprises bring capital market liquidity to our housing markets and have contributed to the unprecedented rate of home ownership in the United States, with relatively low mortgage interest rates."
"As the number of homeowners has grown, so have the Enterprises'. Collectively, Fannie and Freddie carry an astronomical $1.6 trillion in assets on their balance sheets and have outstanding debt of almost $1.5 trillion. Much of this debt is held by banks, and more than 80 bond funds have invested at least half of their assets in the Enterprises' debt. In addition, the Enterprises hold about 45% of the total outstanding residential debt."
"The investment demand for the Enterprises' debt is attributable, in part, to Fannie and Freddie's status as government-sponsored enterprises. As such, the Enterprises receive a number of statutory benefits, including an exemption from state and local taxes and certain regulatory requirements and the availability of a line of credit with the U.S. Treasury."
"Because of these benefits, Wall Street has assumed that the federal government implicitly guarantees the Enterprises' debt and treats the Enterprises' debt as a near equivalent to treasury notes. The market belief in this implied guarantee continues, despite explicit disavowals from the Enterprises and the federal government."
"As the Enterprises grew their balance sheets and developed a more prominent role in the national housing market, Congress created OFHEO in 1992 to regulate the safety and soundness of the Enterprises."
"OFHEO has created an examination program that analyzes, among other factors, the Enterprises' capital reserves, risk portfolio, risk management and corporate governance."
"Effective oversight of the Enterprises' management and operations is critical to maintaining the market's confidence in the fiscal health of the Enterprises and the continued growth of the secondary mortgage market."
"On June 4, 2003, OFHEO delivered its annual report to Congress and declared that its "examinations found both Enterprises to be financially sound and well-managed."
"While this report noted the ongoing restatement of Freddie Mac's financial statements, OFHEO declared that the "audit functions of Freddie Mac are independent and effective."
"OFHEO also stated in the report that it "remains satisfied" that Freddie's board of directors and executive management are taking the appropriate action to address the accounting problems. This report did not discuss the scope of the accounting problems at Freddie Mac or any imminent management changes."
"Despite OFHEO's positive pronouncements regarding Freddie Mac's audit functions, we have come to learn about troubling events and issues surrounding Freddie Mac's accounting policies and practices."
"Although the proper application of Financial Accounting Standard 133 to Freddie Mac's derivatives portfolio appears to remain the primary reason for the restatement, the June 25th press release clarified that the accounting problems extend beyond the interpretation of an accounting rule. Baker & Botts reported that Freddie Mac lacked sufficient accounting expertise and adequate internal controls and management. As a result, Freddie Mac personnel made numerous errors in applying GAAP."
"In addition, Baker & Botts noted that Freddie Mac knowingly executed certain non-GAAP transactions and accounting policies in order to "smooth" its earnings. I am concerned that Baker & Botts reported that Freddie Mac lacked sufficient accounting expertise and adequate internal controls only a few weeks after OFHEO declared that Freddie Mac has effective audit functions."
"In light of these events, I think it is important for this Committee to take a critical and deliberative look at OFHEO's oversight of the Enterprises. Although we do not yet have the final conclusions of the ongoing investigations, we do have sufficient information to examine OFHEO's role in this process."
"I believe that it is time to analyze the scope and sufficiency of OFHEO's regulatory authority over the Enterprises. The public must have confidence that OFHEO has the necessary authority and resources to effectively regulate the Enterprises."
"To date Freddie Mac has been cooperative with the Committee staff. I would expect nothing less and assume that this will continue to be the case. While I will refrain from judgment until the various investigations are completed, I expect complete cooperation with the Committee."
"In due course, the public must come to understand the full breadth of the accounting errors and management decisions that were made at Freddie Mac. I suspect that upon the completion of the various investigations into the circumstances surrounding Freddie Mac's restatement, this Committee will hold hearings to review the findings and conclusions."