Scandal has involved the U.S. home mortgage market which in turn has contributed to the loss of value of the U.S. dollar. Our government doesn’t directly fund or guarantee house mortgages, but it created programs to obtain mortgage loans. To do this the government charted two corporations. They are The Federal National Mortgage Association ("Fannie Mae") and The Federal Home Loan Mortgage Corporation ("Freddie Mac").
Fannie Mae was created by the United States Government in 1938 to help provide a supply of money for mortgages by buying and guaranteeing home mortgages. Through buying residential mortgages and reselling them it provides lenders with money to make new loans and stimulates the residential home buying market. It is responsible for financing some one of every five U.S. home loans or 80% of the market. It purchases residential mortgages and resells them.
The second federally charted company, Freddie Mac, was created in 1970 to further encourage affordable home buying. It buys both first mortgages as well as second mortgages that are guaranteed by the FHA or federal government agencies and then sells them to investors. Both companies are under the oversight of the Federal Housing and Urban Development Office (HUD) Both of these companies are privately owned and publically traded on the stock exchange. These corporations receive no direct government funding or guarantees. However, investors generally believe the U.S. Government would step in to prevent financial failure should there be a problem which has encouraged investment in their sales.
The government also created a third entity to support residential home purchases. In 1968 Fannie Mae was divided into two separate entities. The new entity was named Government National Mortgage Association, commonly called "Ginnie Mae." It is a wholly owned corporation under HUD whose main purpose is to provide financing to low and moderate income families in purchasing homes. It too, sells mortgages on the secondary market so as to lower the rates on mortgages in the primary market. It does this by guaranteeing payment on mortgage backed securities.
The home mortgage market is an $8 Trillion dollar one and Fannie Mae is one of the largest investors in the market. However, regulators accused it in 2004 of manipulating earnings from 1998 through 2004 in order to justify bonus payments of millions of dollars to corporate executives and falsely reporting earnings to encourage investors. The SEC filed fraud charges against it and the company agreed to pay a $400 million dollar penalty. It was required to provide an accurate accounting of profits and losses to investors and the government, but the accounting was so difficult to unravel it took two years at a cost of some $1.4 Billion dollars to do it. It was one of the largest accounting restatements in history. When it was over $6.3 Billion was removed from the books as falsely reported profit and a $7.9 Billion loss on investments added.
Fannie Mae then sued KPMG, it’s outside auditor, for $2 Billion dollars alleging accounting malpractice in overseeing it’s books. The accounting company performed the work for Fannie Mae over a thirty five year period, but was fired in 2004 when the scandal became public.
Now Federal regulators have sued three former Fannie Mae executives, including the former CEO Franklin Raines and the former CFO Timothy Howard along with the former controller Leanne Spencer. The government seeks recoup $115 Million in compensation paid them plus penalties of more then $100 Million claiming they manipulated earnings to increase their bonuses and to mislead investors, costing shareholders billions of dollars. Raines was paid $91 Million in compensation, Howard $31 Million and Spencer $5.6 Million. Not only that, Raines received a "golden parachute" payment of $114,000 a month for the rest of his life.
As a result of all of this, foreign investors and other major financial institutions began pulling away from investment in the U.S. housing market. This in turn impacted the value of the dollar which lost over 15% of it’s purchasing power in 2006 against the British pound, the Euro and the Yen. Chinese, European, Japanese and British bankers began selling off dollar reserves at the news of a $6.3 Billion dollar write off by Fannie Mae causing a loss in the value of the U.S. dollar against foreign currency. Corporate greed and an administration whose regulators turn a blind eye to their conduct hurts all of us.