Published: September 07, 2008 02:34 am            

Fannie, Freddie blind to the bubble

WASHINGTON — Mortgage giants Fannie Mae and Freddie Mac — despite their robust cadre of economists and mortgage experts — failed to heed warnings that the most dramatic housing bubble in U.S. history would burst.

The companies — particularly Freddie Mac — didn’t raise enough cash to reassure Wall Street that they would be able to withstand a severe downturn in U.S. home prices.

Federal regulators after scouring the companies’ books with aid from investment bank Morgan Stanley believe the companies pushed accounting conventions when calculating their financial cushion against losses, a person briefed on the matter said Saturday. The person declined to be named because details of the government’s actions were not yet public.

As their losses started rising at alarming rates over the past year, investors gradually lost confidence, forcing the government’s historic takeover of the two companies, which could be announced as soon as Sunday and was expected to include the ouster of top executives.

Rep. Barney Frank, D-Mass., the chairman of the House Financial Services Committee, said in an interview Saturday that the companies’ financial picture was better than investors assumed, but “it just plainly became clear that elements of the market wouldn’t accept that.”

Investors have had reasons to feel jittery.

On Friday, the Mortgage Bankers Association said that more than 4 million American homeowners with a mortgage, a record 9 percent, were either behind on their payments or in foreclosure at the end of June.

Also on Friday, Nevada regulators shut down Silver State Bank, the 11th failure this year of a federally insured bank. In July, regulators seized IndyMac, which had $19 billion in deposits. And earlier this year, the government orchestrated the takeover of investment bank Bear Stearns Cos. by JPMorgan Chase & Co.

        

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