Finance & Accounting
Pages 8 (2008 words)
Fannie and Freddie’s Fraud: Misstated Earnings, Exploitation of Stakeholders Name University Introduction From public trust to public downfall, two large American government-sponsored enterprises (GSEs), Federal National Mortgage Association (Fannie Mae) and Federal Home Loan Mortgage Corporation (Freddie Mac), became involved in misstatements and other fraudulent acts, which the Office of Federal Housing Enterprise Oversight (OFHEO) revealed in its 2006 report, Report of the Special Examination of Fannie Mae.
The Fraud This section describes the business activities of Fannie and Freddie before the fraud occurred. Since the 1990s, lenders have been increasingly using automated underwriting systems (AUSs), a technology that changed the mortgage industry (DiVenti, 2009, p.236). These systems executed underwriting criteria and statistical algorithms to foresee the default likelihood of loan applications (DiVenti, 2009, p.236). GSEs became industry leaders in the growth and adoption of these systems, which they used to appraise their loan purchases. Fannie Mae’s system, Desktop Underwriter, and Freddie Mac’s system, Loan Prospector, significantly decreased the expenses and time linked with loan approvals (DiVenti, 2009, p.236). In 2000, Fannie Mae and Freddie Mac broadened their procurements to comprise “Alt-A,” A-minus, and subprime mortgages, aside from private-label mortgage securities (Blackburn & Vermilyea, 2010, p.5). In order to expand their mortgage purchases, Fannie Mae used the Expanded Approval system and Freddie Mac enlarged its Loan Prospector system to contain risk-based pricing (DiVenti, 2009, p.236). ...