WASHINGTON – The waiting is over. After more than two years of review of more than eight million pages of documents, the Office of Federal Housing Enterprise Oversight on Fannie Mae released its “Report of the Special Examination of Fannie Mae” last week. In the end, the regulator spared no words nor left little open for interpretation. Calling the housing Government Sponsored Enterprise a “faade,” the OFHEO criticized Fannie Mae for earnings manipulation and said the report details “an arrogant and unethical corporate culture where Fannie Mae employees manipulated accounting and earnings to trigger bonuses for senior executives from 1998 to 2004.” In a prepared statement, OFHEO Acting Director James Lockhart said, “The image of Fannie Mae as one of the lowest-risk and `best in class’ institutions was a faade. Our examination found an environment where the ends justified the means. Senior management manipulated accounting; reaped maximum, undeserved bonuses; and prevented the rest of the world from knowing. They co-opted their internal auditors. They stonewalled OFHEO.” He added, “Fannie Mae’s executives were precisely managing earnings to the one-hundredth of a penny to maximize their bonuses while neglecting investments in systems internal controls and risk management. The combination of earnings manipulation, mismanagement and unconstrained growth resulted in an estimated $10.6 billion of losses, well over a billion dollars in expenses to fix the problems, and ill-gotten bonuses in the hundreds of millions of dollars.” According to the Summary of Findings in the report, “During the period covered by this report-1998 to mid-2004-Fannie Mae reported extremely smooth profit growth and hit announced targets for earnings per share precisely each quarter. Those achievements were illusions deliberately and systematically created by the Enterprise’s senior management with the aid of inappropriate accounting and improper earnings management.” The report states that the accounting errors resulted in Fannie Mae overstating reported income and capital by a currently estimated $10.6 billion. “By deliberately and intentionally manipulating accounting to hit earnings targets, senior management maximized the bonuses and other executive compensation they received, at the expense of shareholders. Earnings management made a significant contribution to the compensation of Fannie Mae Chairman and CEO Franklin Raines, which totaled over $90 million from 1998 through 2003. Of that total, over $52 million was directly tied to achieving earnings per share targets.” The report also stated that “senior management did not make investments in accounting systems, computer systems, other infrastructure, and staffing needed to support a sound internal control system, proper accounting, and GAAP-consistent financial reporting. Those failures came at a time when Fannie Mae faced many operational challenges related to its rapid growth and changing accounting and legal requirements.” Lastly, the report cited Fannie Mae senior management who “sought to interfere with OFHEO’s special examination by directing the Enterprise’s lobbyists to use their ties to Congressional staff to 1.) generate a Congressional request for the Inspector General of the Department of Housing and Urban Development (HUD) to investigate OFHEO’s conduct of that examination and 2.) insert into an appropriations bill language that would reduce the agency’s appropriations until the Director of OFHEO was replaced.” As part of the settlement reached by OFHEO and the SEC with Fannie Mae, the GSE has agreed to implement corrective measures and pay a collective penalty of $400 million. OFHEO said it entered into the agreement in lieu of pursuing administrative or enforcement actions and to expedite movement toward reforms at Fannie Mae. In addition, other key aspects of the settlement include: * Fannie Mae will limit growth of its portfolio mortgage assets to the level of Dec. 31, 2005. OFHEO said this action “is based on the ongoing internal controls, risk management and accounting deficiencies and the need for the Enterprise to provide OFHEO an acceptable business plan for managing its market activities.” * Fannie Mae will undertake a comprehensive reform program targeting top-to-bottom change, “from corporate culture and tone to specific changes in journal entries, accounting procedures, briefings of the Board and officers on legal responsibilities, operational risk, reorganization of internal audit and other control functions.” * Fannie Mae will undertake a review of current and separated employees for remedial actions. Fannie Mae is also directed to put in place, qualified individuals with appropriate skills and adequate resources, and to provide a strong, training program. “Though Fannie Mae has clearly made, and continues to make, numerous and substantial changes, it is important for Congress to pass a fair and meaningful GSE bill this year,” said NAFCU Senior Vice President of Government Affairs Dan Berger.