Business is fine, despite Freddie

Mortgage experts said business is not, apparently, affected by the doings at mortgage giant Freddie Mac, which replaced its top three executives last month in the wake of questions about its accounting methods.

With mortgage interest rates still close to 45-year lows, most prospective homebuyers are focusing on finding houses and securing loans, bankers and brokers said. And many local mortgage industry professionals said they have heard little from consumers about the Freddie Mac concerns on Wall Street.


"We haven't heard any negative information from customers or concerns about relying on Freddie Mac," said Bob Kaestner, vice president and sales manager with the consumer real estate division of Bank of America and an officer with the Maryland Mortgage Bankers Association.

Many financial experts agree that consumers shouldn't be anxious about how Freddie's travails affect them - at least for now.


"At this point, there's no meaningful impact on consumers in terms of interest rates," Bert Ely, a banking industry consultant in Alexandria, Va., said shortly after the accounting concerns were announced.

The worst-case development is that the mortgage company might be financially unstable, though few seem to view that as likely. They speculate that the accounting uproar is unlikely to put a dent in the home mortgage industry.

Even if homebuyers and refinancers should be worried, it's unlikely that most have much of a grasp on what Freddie Mac is or does. One of the curiosities of the financial markets is that the activities of Freddie Mac and its larger cousin, Fannie Mae, touch the daily lives of millions of homebuyers, yet they're little understood by the public.

What Fannie and Freddie, which own or guarantee almost half of all U.S. home mortgages, do is keep the supply of mortgage funds flowing for the nation's banks and other lenders.

The two federally chartered but independent businesses buy mortgages from the lenders and resell them to investors as guaranteed bonds. The local lenders, in return, don't have their holdings tied up in long-term loans and can do more mortgage business, thus making homeownership more widely available.

The concern about Freddie began in January when PricewaterhouseCoopers, its new auditor (replacing Arthur Andersen), questioned some of the accounting methods of the company's earnings statements. Freddie then announced it would restate its earnings for 2000, 2001 and 2002. Officials said late last month that the errors likely will boost earnings by $1.5 billion to $4.5 billion for the past three years.

Subject of lawsuits

Within days of the initial announcement, Freddie Mac went from being a quietly reliable stalwart of the secondary mortgage market to the subject of class action lawsuits, promises of congressional hearings and Securities and Exchange Commission queries. Federal prosecutors announced a criminal investigation.


"[Freddie Mac] said, 'We'll get back to you in June.' Then they drop this bombshell on us," said James A. Bianco, president of the Bianco Research fixed-income research firm and brokerage in Chicago.

That bombshell came June 9 when Freddie fired Chief Operating Officer David Glenn and accepted the resignations of Chief Executive Officer Leland C. Brendsell and Chief Financial Officer Vaughn Clarke.

Freddie Mac stockholders have seen shares fall from $59.87 June 6, the last trading day before the accounting concerns were announced. Freddie Mac shares closed last week at $53.50. The stock is down 10.6 percent since the accounting concerns were announced, but it has rallied.

Industry representatives such as Kaestner said that they don't believe Freddie's business model has changed, and that the company is working to put the accounting concerns behind it.

Enjoying an advantage

Critics of Fannie and Freddie say that their quasi-governmental status puts other firms at a competitive disadvantage, and that they should not be exempt from SEC oversight.


"What homebuyers should understand is that as borrowers they're going to see little impact, but as citizens they should be concerned" if Freddie Mac turns out to have solvency problems, said Ely, who added that in a worst-case scenario the federal government might have to bail it out. "However, that doesn't look probable now."

Company officials repeatedly have said that the problems were limited to accounting errors, and that Freddie's financial condition is sound.

The bailout prospect is lending a degree of calm to most concerns about Freddie, though it's based on something of a misperception that long has worked in Freddie and Fannie's favor, investment experts say.

"The financial markets view Freddie and mortgage-backed securities as being implicitly backed by the government," Ely said. "Officially, legally, they're not, but the market believes that they are," which is why investors have been comfortable buying securities from them.

In turn, they believe that in a fiscal crisis, the government, as Ely put it, "would ride to the rescue quickly."

But long term, the worries might play out in higher mortgage interest rates, some experts said. If Freddie is distracted by the accounting scandal and faces reluctance from investors, that could hurt its business, which in turn might mean higher interest rates.


Back in the consumer side of the mortgage world, few voice immediate concerns. "It's a huge leap to make to the consumers," said Dale Westhoff, senior managing director of Bear, Stearns & Co. "Right now, this is an accounting issue."

Mary Umberger writes for the Chicago Tribune, a Tribune Publishing newspaper. A Sun staff writer and the Associated Press contributed to this article.