Fannie Mae’s Fraud
1. Fannie Mae was established in 1938 as a federal charter under President Franklin Roosevelt as a secondary market to expand the flow of mortgage money under any economic condition because millions of Americans could not become homeowners before Fannie Mae. In 1968 Fannie Mae was rechartered by congress as a shareholder owned company, funded solely with private capital raised from investors. The charter is directed to increase the availability and affordability for homeownership for low, moderate, and middle-income families. Fannie Mae purchases home mortgages from banks, guaranteeing them, and then resells them to investors, which helps the banks to eliminate the credit and interest rate risk. (Fannie Mae Case) Fannie Mae has an advantage over commercial banks, like the US Treasury, Fannie Mae can buy $2.25 billion of each company’s debt, receive exemption from local and state taxes, and implied government backing gives them the ability to take on large amounts of home loans without increasing their low cost of capital. Fannie Mae committed a fraud, where it overvalued its assets, overstated profits, underreported credit losses, and exploited tax credits. To cover their losses, Fannie Mae purchased finite insurance policies to smooth out the earnings. The two people involved in the fraud were Franklin Raines, chairman and CEO, and Timothy Howard, CFO, which both resigned from Fannie Mae. The top executives of Fannie Mae today are CEO Daniel Mudd, COO Michael Williams, and CFO Stephen Swad. The person responsible for the recognition of the fraud is Roger Barnes, who was an accountant for Fannie Mae, and for five years, was complaining that the accounting practices were flawed. The auditing company that was hired by Fannie Mae during the fraud was KPMG and the auditing company that took over was Deloitte and Touche. Deloitte and Touche was hired by the government at first to be the independent auditor.
2. Fannie Mae did not follow all of...
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