The GSEs and their regulator, the Office of Federal Housing Enterprise Oversight, continued to make headlines after the Department of Housing and Urban Development released a report suggesting that the OFHEO's recent investigation of Fannie Mae's accounting rules was politically motivated. To further complicate matters, the Senate and House of Representatives also asked for a change in the OFHEO leadership as part of the $388 billion spending bill providing funding for the different cabinet departments.

Analysts said these developments currently have no direct impact on the MBS market, however, the critical report casting the OFHEO's Director Armando Falcon, Jr. and Deputy Director Stephen Blumenthal in a negative light slightly increases the chances that a GSE regulatory reform bill will pass in 2005. The report tarnishes the reputation of the OFHEO among members of Congress, said analysts, and may increase support for transferring GSE regulation to the Treasury.

In a publication written after the HUD report was released publicly - it has been available to Congress for over a month - JPMorgan Securities said, "The release of this report showing the lack of professionalism exhibited by the OFHEO reinforces our view that there is likely to be growing bipartisan consensus in the House and Senate to enhance the regulatory structure of the GSEs." Analysts added that this would also increase the chance of a compromise from both sides of Congress on some of the more divisive issues.

The key point of the HUD report was to show the division between the OFHEO leadership and its staff in determining how to proceed with the Fannie Mae investigation. The OFHEO staff members said the agency's leadership cared less about the safety and soundness of the GSEs, opting instead to redeem its name by pressuring Fannie Mae to make adjustments to its bookeeping after Freddie Mac's accounting problems in 2003.

Despite the negative report, the HUD stated that it would not pursue any actions against the OFHEO while the Department of Justice also refused the case. Furthermore, Congress approved a $59.2 million fiscal year 2005 budget for the OFHEO. Representatives from the agency said they are happy that the full budget request went through.

Falcon also released a statement saying, "I am pleased that a determination has been made that I followed the law, acted wholly within my authority as director and that this is now a closed matter. We will continue to do the important work of the OFHEO and not divert our attention from the serious matters before the agency."

Though the OFHEO director's term expired on Oct. 5, he had previously expressed his intention to stay until the Senate confirms his replacement. Thus though the HUD report is not expected to lead to Falcon's resignation, analysts said it might speed up the process of nominating his successor.

JPMorgan analysts said the HUD report does not have direct implications on the ongoing Securities and Exchange Commission investigation of Fannie Mae's accounting. However, since the report stated that the OFHEO was politically motivated in looking at Fannie Mae's books, this could bolster the GSE's defense relating to unresolved FAS 133 issues. "We continue to believe there is a lot of grey area in FAS 133 and the main discrepancies appear to be a difference of opinion between auditors," added JPMorgan analysts.

Copyright 2004 Thomson Media Inc. All Rights Reserved.

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