Two days after Freddie Mac removed its top three executives amid questions over its accounting practices, a criminal investigation has been launched into the huge government-chartered mortgage company, as well as a formal investigation by the Securities and Exchange Commission.
Paul McNulty, the U.S. attorney for the Eastern District of Virginia, said yesterday that his office has “initiated an investigation involving Freddie Mac. No further comments will be made at this time.”
Late yesterday, Freddie Mac said it had not received any communications from government investigators at the U.S. Attorney’s office but added it would cooperate. Freddie Mac also announced the SEC had launched a formal investigation but neither the company nor the SEC would provide details.
“Since January of this year, the board of directors has ordered full cooperation with the SEC’s informal inquiry,” Freddie Mac said in a statement.
Should Freddie Mac’s finances be in serious trouble, investors would expect a greater return on the mortgage-backed securities, pushing up yields, said Paul Miller, managing analyst with Friedman Billings Ramsey in Arlington, Va. This would raise interest rates to consumers – which could bring about an end to the housing boom, he said.
But it’s far too early to tell if Freddie Mac has any real problems, said Marcia Kaufman, chief operating officer of Preferred Empire Mortgage in Melville.
Jonathan Pinard, president of Empire State Mortgage Association, added, “It is not like Enron. Freddie Mac understated its earnings.”
And Credit Suisse First Boston agency analyst David Ging said, “I doubt we have a systematic problem here,” adding that Freddie Mac is a “very profitable company.”The troubles at the company stem from Freddie Mac’s announcement in late January that the firm was restating its 2000, 2001 and 2002 earnings. The announcement was based on an audit by Pricewaterhouse Coopers, which replaced now-bankrupt Arthur Andersen LLP, that found that Freddie Mac was not following commonly accepted accounting principles with some of its derivative transactions.
On Monday, Freddie Mac chief executive David Glenn was fired over questions about his “cooperation and candor with the Board Audit Committee counsel” to review the accounting errors. Two other top executives were forced to resign.
Freddie Mac, along with another large congressionally chartered company, Fannie Mae, helps fund the mortgage market by buying home loans from lenders and repackaging them in securities that it sells to investors. Lenders, in turn, are able to make loans at competitive interest rates knowing they can sell them to these companies, as long as the loans meet certain criteria, said Michael Strauss, chief executive officer of American Home Mortgage in Melville.