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MCLEAN, Va. – Another corporate scandal? Maybe, but maybe not. At this point, the jury’s still out on what effect massive leadership changes by the board of directors of Freddie Mac announced June 9 will have on the continuing strong mortgage market that experts say has sustained an otherwise soft economy. Last week, the Board of Directors of Freddie Mac, in a series of moves made in the wake of the company’s restatement earlier this year by its new auditor, PricewaterhouseCoopers, of the company’s 2000, 2001, and 2002 financial results, and questions concerning the circumstances surrounding accounting errors, fired its president and chief operating officer and made other leadership changes as well. David Glenn, president and COO was terminated “because of serious questions as to the timeliness and completeness of his cooperation and candor with the Board’s Audit Committee,” a Freddie Mac release stated. The Audit Committee was retained this past January to review the facts and circumstances concerning the restatement. Freddie Mac said it informed its regulator, the Office of Federal Housing Enterprise Oversight (OFHEO), the SEC, and the NYSE about its decision, and said the “board and management are fully cooperating with the OFHEO, the SEC and the NYSE and will continue to do so.” Along with Glenn, the board announced the retirements of Leland Brendsel as chairman and CEO and his resignation from the board, and Vaughn Clark, executive vice president-chief financial officer. Gregory Parseghian, was elected president/CEO of Freddie Mac by the company’s board of directors. He was formerly executive vice president-single family. In addition, Paul Peterson, executive vice president, was named chief operating officer; Martin Baumann, executive vice president-finance, was appointed Chief Financial Officer; and Shaun O’Malley was elected as chairman of the board. Freddie Mac said “the likely cumulative effect of the restatement will be to materially increase the reported levels of GAAP earnings and `Operated Earnings.’” The company also expects further volatility in reported quarterly earnings for the three periods, but it expects that adjustments affecting its income recognition and associated balance sheets will have offsetting effects in future periods. “Expected adjustments will have no adverse impact on the economics of the corporation, as represented by Freddie Mac’s current fair market value and market risk disclosures,” a Jan. 27th company release stated. PricewaterhouseCoopers was appointed Freddie Mac’s auditor in March 2002. It replaced Arthur Andersen. According to the same release, “Freddie Mac and PwC have concluded that in some instances the application of certain accounting policies, as used by Freddie Mac and concurred with by Arthur Andersen, were not consistent with generally accepted accounting principles (GAAP).” In a conference call on June 9 arranged by Freddie Mac to comment on the leadership changes at the company, O’Malley said, “The board was not pleased to find itself in a situation where the company’s financial statements for certain past years were being reaudited.” Parseghian said Freddie Mac doesn’t believe that fraud or criminal misconduct were involved in the company’s accounting problems. “An important message today is also that your Board of Directors holds management accountable and will continue to hold management accountable. As CEO, I will be accountable for each and every issue of significance facing our company,” he told listeners. In 2002, Freddie Mac announced record earnings. The company’s unaudited operating earnings showed the company had $3.854 billion in earnings, an increase of 22% from 2001; its unaudited generally accepted accounting principles (GAAP) earnings indicated it had $5.764 billion in net income, up 39% from 2001. In addition, its total mortgage portfolio increased by $173 billion during 2002, representing a 15% growth. Despite Freddie Mac’s attempt to cushion the news of the reorganization of its management team, some congressmen on Capital Hill weren’t ready to make light of the situation. On June 10th, Rep. Michael Oxley (R-Ohio), chairman, House Financial Services Committee announced that the Capital Markets Subcommittee chaired by Rep. Richard Baker (R-La.) will hold hearings to examine accounting issues at Freddie Mac. The hearings will also address regulatory oversight of the housing government sponsored enterprises. “Congress needs to get the true story about what was happening at Freddie Mac and what top management was really doing to resolve questions about the company’s books. But we should be just as concerned to find out what regulators knew-or didn’t know-about what was going on there, why they didn’t know, and what they were doing about it since January. These housing GSEs are too important and have too great a role in financial markets for Congress not to make sure adequate and effective oversight is in place to protect investors, homebuyers, and taxpayers from missteps like this ever happening again,” said Baker. The House Financial Services Committee said hearing dates and witness lists will be announced at a later date. The SEC said it also plans to investigate Freddie Mac. At this point, it remains to be seen what effect if any, Freddie Mac’s actions will have on credit unions’ mortgage lending activity. Many credit unions and CUSOs, including CU mortgage lending leader Navy FCU, have secondary market relationships with Fannie Mae. But Mike Schenk, CUNA’s vice president of economics and statistics opined that “clearly all GSEs will come under increased scrutiny” because of Freddie’s restatement of its earnings and leadership changes. Beyond that though, Schenk said the effects of the company’s actions on credit unions’ mortgage activity was uncertain. He speculated, for example, that credit unions could possibly see small increases in mortgage rates. Credit unions could also possibly see a downward trend in the Treasury yield curve as investors back away from mortgage securities. If that happens, it could put a squeeze on credit union mortgage earnings, “but for the most part, credit unions’ mortgage lending activity should stay at the high levels they’ve seen,” said Schenk. Dan Rotert, svp and chief operating officer for CUNA Mutual Mortgage said he wasn’t surprised by Freddie Mac’s actions, and he emphasized that the restatement of three year’s worth of financial results for Freddie Mac “in no way compares to the other major accounting scandals like WorldCom and Enron” He added that, “Freddie Mac has kept CUNA Mutual Mortgage well-advised of everything that’s going on, and they were very candid with us about the restatement. In this environment of accounting scrutiny, it’s always a cause for questioning.” As for the change in leadership at Freddie Mac, Rotert said “the folks who assumed leadership positions have a good track record. CUNA Mutual Mortgage has no concern about its continuing relationship with Freddie Mac. “The change in leadership is what investors and the economy would expect when a company has to restate its earnings,” Rotert added. “If Freddie Mac hadn’t taken the initiative and made the leadership changes it did, there would have been pressure from investors to do so. Freddie Mac by making the leadership changes, chose to be proactive rather than reactive.” He also wasn’t surprised at Reps. Oxley and Baker’s decision to hold hearings on Freddie Mac’s accounting issues. “Because of the major accounting scandals the country has dealt with, there is heightened scrutiny as there should be,” Rottert said. -

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