REPORT: Fannie and Freddie dodge billions in write-offs to protect bottom line

by Ryan Smith20 Aug 2013

Fannie Mae and Freddie Mac, which reported record profits this year, are dodging billions of dollars in write-offs on delinquent loans as they delay the implementation of new accounting procedures, according to a letter from the Federal Housing Finance Agency’s inspector general.

In 2012, the FHFA ordered Fannie and Freddie to start writing off all loans delinquent for more than 180 days – loans that the companies had not previously written off. However, Fannie and Freddie were later given until January of 2015 to comply with the new accounting procedures.

But in a letter to FHFA Acting Director Edward J. DeMarco, the agency’s inspector general, Steve Linick, recommended that the new procedures -- outlined in the FHFA’s Advisory Bulletin No. 2012-02 -- be implemented immediately. Linick wrote that the change could have a significant impact on the companies’ bottom lines.

“Three years appears to be an inordinately long period to fully implement” the new procedures, Linick wrote in the letter, dated Aug. 5 and publicly released Monday.

Although Fannie and Freddie mentioned the new accounting procedures in their quarterly SEC filings, neither company reported how much their estimated losses would be if the procedure were implemented. However, Linick wrote that the accounting change “could potentially require them to charge of billions of additional dollars related to loans classified as ‘loss.’”

Linick told the FHFA that the new procedures should already have been in effect by now.

“FHFA determined there was a need for an asset classification policy at (Fannie and Freddie) to better manage risk associated with single-family mortgage loans,” Linick wrote.“Its advisory bulletin sought to implement a method widely accepted by other regulators and financial institutions in the industry. It did not find that this method would be preferable in 2015. It found it preferable immediately.”

Linick recommended that the FHFA “require Fannie Mae and Freddie Mac to promptly report to FHA and (the office of the inspector general) the estimated impact on their financial statements as if the advisory bulletin took effect immediately, and thereafter provide such reports on a quarterly basis; and … provide OIG justification for agreeing to delay the advisory bulletin’s implementation.”

In an Aug. 9 response to Linick’s letter, FHFA deputy director Jon D. Greenlee said that Fannie and Freddie were given until 2015 to implement the new system because “changes in a significant policy … require considerable changes to systems and operations that could take time to complete in a safe, sound and well-controlled manner.”


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