Risk & Compliance

Regulator Getting Tough with Freddie Mac

Higher operational risk necessitates a higher capital requirement.
Stephen TaubJanuary 30, 2004

The government agency that oversees Freddie Mac ordered the number-two mortgage-finance company to increase its minimum capital requirement by 30 percent due to the higher operational risk arising from the company’s recent accounting scandal.

The Office of Federal Housing Enterprise Oversight (OFHEO) said Freddie must hold 30 percent more capital than its current minimum requirement of 2.5 percent of assets plus 0.45 percent of off-balance-sheet obligations until the government-sponsored enterprise reports earnings in a timely fashion.

“This capital directive by OFHEO will help to assure the public and Congress that Freddie Mac will remain financially healthy as it works to restore the public’s trust,” said Armando Falcon, the regulatory agency’s director.

“Freddie Mac remains well capitalized and well positioned to fulfill our mission, including responding appropriately to provide stability in the mortgage market,” said Freddie Mac chairman and CEO Richard F. Syron in a statement. “While OFHEO’s framework includes stringent monitoring and imposes restrictions on share repurchases, we do not expect it to adversely affect our disciplined growth strategy or require us to raise additional capital.”

The OFHEO said it will monitor Freddie Mac’s capital position on a weekly basis. If the regulator were to determine that the company had unreasonably deviated from the framework established in the letter, it would require Freddie Mac to submit a remedial plan or to take other remedial steps.

In addition, Freddie Mac is required to obtain prior written approval from the Director of OFHEO before engaging in certain capital transactions, including the repurchase of any shares of common stock or the redemption of any preferred stock.

Last month the OFHEO fined the mortgage company $125 million for actions that led to its recent restatement of its financials. The regulator found a pattern of inappropriate conduct and improper management of earnings that led to the restatement.