Old Computer, New Woes for Freddie Mac

Since 2001, the mortgage-finance company miscalculated interest income due to an error in a legacy computer system used for certain mortgage-relate...
Stephen TaubNovember 8, 2005

Freddie Mac has announced a revision of previously reported financial results. The embattled mortgage-finance company, fresh off a major accounting scandal, will reduce net income for the first half of 2005 by about $220 million, to $1.4 billion.

For a company trying to rebuild its credibility, this is a major embarassment — especially when the cause, according to Freddie Mac, is an old computer system.

The company explained that since 2001, it miscalculated interest income due to an error in a legacy computer system used for certain mortgage-related securities (primarily non-agency securities) that
accrue interest on other than a calendar-month basis. The system over-accrued interest income beginning in the month of purchase; over-accruals generally decreased as the security paid down and reversed in the month the security was sold or matured.

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Freddie Mac noted that management found and corrected the miscalculations in the course of its ongoing internal-control enhancements. It also stressed that the correction represents less than 1 percent of the company’s $36.1 billion reported regulatory core capital as of June 30.

“We’ve made enormous strides in fixing our financial infrastructure but, as we have previously disclosed, the effort is not yet complete,” said chief financial officer Martin Baumann, in a statement. “When we found this error, we corrected it immediately. We are continuing to move forward to complete the job of producing timely, accurate financial reports early in 2006.”

The correction “certainly is a bit of a ‘black eye’ for Freddie’s financial reporting process,” said Credit Suisse First Boston analyst Moshe Orenbuch, according to the Associated Press. In a research note, he also observed that the size of the correction was relatively small and likely would not delay the company’s progress toward untangling its accounting.

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