By Andrew LePage, Bee Staff Writer
Even as the investigation of Freddie Mac widened into a criminal probe Wednesday, experts said it doesn't appear that the home mortgage giant's accounting woes threaten the housing boom.
But they're quick to note that this assumes Freddie Mac's troubles are limited to financial reporting technicalities and don't include more fundamental, widespread problems, such as misreporting loan performance.
Federal prosecutors in Virginia said Wednesday they've opened a criminal investigation into possible misconduct at Freddie Mac, whose accounting already was being probed by other U.S. authorities. The company said an informal probe by the Securities and Exchange Commission, begun in January, has become a formal inquiry.
In the wake of Enron and other recent corporate meltdowns, the fear is that this week's surprising news on Freddie Mac could prove "the tip of the iceberg," as one academic put it.
"My sense is that based on what we know to date ... the likelihood for any sort of serious impact on housing or mortgage markets remains small," said Stuart Gabriel, director of the University of Southern California's Lusk Center for Real Estate.
Freddie Mac said Monday that it had fired company President David Glenn because he did not fully cooperate with an internal review of the firm's books. Resigning were Chairman and Chief Executive Leland Brendsel - who got a special pay package worth some $24 million - and Vaughn Clarke, the company's executive vice president and chief financial officer.
The plight of the McLean, Va.-based Freddie Mac is critical to home sales, which remain one of the few bright spots in the U.S. economy. Freddie Mac is one of two pillars in the multitrillion-dollar mortgage market, along with its larger sister Fannie Mae.
Created by Congress, both buy home loans from banks and other lenders to supply ready cash to the home-mortgage market. They keep some mortgages in their portfolios and package others into securities for sale on Wall Street.
Last year, Freddie Mac purchased billions of dollars worth of home loans made by lenders in the capital region, including thousands of mortgages for low- and moderate-income families.
Experts warn that disrupting Freddie Mac's huge role in fueling the nation's home loan market could send mortgage rates higher, the equivalent of throwing water on a still-hot housing sector. The national associations for homebuilders and Realtors predict sales this year will approach or exceed last year's record levels.
"The biggest fear is that this is a scandal that could in some way imperil the functioning of Freddie Mac as a significant player in the secondary mortgage markets," Gabriel said.
So far, however, analysts say the mortgage markets have remained orderly. Gary Gordon, a UBS Warburg analyst who follows Freddie Mac and Fannie Mae, said he sees no evidence that Freddie Mac's accounting problems will impact housing.
"This is an issue about Freddie Mac, not about housing," Gordon said. "You'd have to assume that out of these announcements there was regulatory action that forced them to limit their activities, and that's just in no one's interest."
Federal Reserve Governor Susan Bies also said Freddie Mac's accounting travails have not had an immediate impact on the U.S. banking system or housing market and that consumers shouldn't feel any negative effect.
"The housing market is still very strong," Bies said. "And banks as a whole are very liquid right now; they have plenty of room to extend credit. So I haven't seen any signs that there will be a short-run impact."
Hoping to capitalize on Freddie Mac's turmoil are critics who've been pushing for more regulatory reform of Freddie Mac and Fannie Mae.
On Tuesday, leaders of the House Financial Services Committee called for hearings. And Federal Reserve Chairman Alan Greenspan said Freddie Mac and Fannie Mae shouldn't be exempt from public disclosure requirements that apply to nearly all other publicly traded companies.
Freddie Mac, one of the nation's biggest corporations with its stock widely held, also is being investigated by the Office of Federal Housing Enterprise Oversight. The agency supervises both Freddie Mac and Fannie Mae.
Freddie Mac shares fell $1.50 on Wednesday, to close at $50 on the New York Stock Exchange. The company's announcement that it will buy back as much as $10 billion of its own notes in the next two days helped bring a measure of stability, financial experts said.