Fannie Mae issued a press release announcing that Stephen Ashley, a member of the Fannie Mae Board of Directors, will become the non-executive chairman of the board. Vice Chairman and COO Daniel Mudd will serve as interim CEO and Executive Vice President Robert Levin will serve as interim chief financial officer. The executive search firm Spencer Stuart has been retained to work with the board. The board further announced that its audit committee dismissed the firm KPMG LLP as the company’s independent auditors, and has initiated a search for a new independent auditor.

In a statement issued Tuesday night, Raines said he held himself accountable for mistakes made in Fannie Mae’s accounting. The Securities & Exchange Commission recently directed Fannie Mae to make corrections to its financial statements that could result in the company recording as much as $9 billion in previously stated earnings dating back to 2001.

“I previously stated that I would hold myself accountable if the SEC determined that significant mistakes were made in the company’s accounting,” Raines said in the statement. “Although, to my knowledge, the company has always made good faith efforts to get its accounting right, the SEC has determined that mistakes were made. By my early retirement, I have held myself accountable. I am proud of the strides we have made at Fannie Mae during my tenure as CEO on behalf of shareholders as well as American homeowners. I wish to express my thanks to the wonderful employees of Fannie Mae who joined me in reaching our goals.”

“Fannie Mae is a great company deeply committed to its mission of expanding the dream of homeownership to all Americans and serving the nation’s housing needs,” said Ann Korologos, the presiding director of the non-management members of the board. “We appreciate the many contributions of Frank Raines and Tim Howard, their devotion to Fannie Mae and their commitment to its mission. Fannie Mae’s Board of Directors takes these steps today to move the company forward to serve its critical mission in a safe and sound manner.”

Raines had held the CEO position since 1999.

Meanwhile, the Office of Federal Housing Enterprise Oversight (OFHEO), which regulates the safety and soundness of Fannie Mae, issued a statement yesterday classifying Fannie Mae as “significantly undercapitalized” as of September 30.

The OFHEO statement said as of September 30, Fannie Mae's minimum capital requirement stood at $31.837 billion, but its core capital of $28.856 billion ($38.032 billion adjusted for $9.176 billion) was less than the minimum capital requirement by $(2.981) billion. Fannie Mae's risk-based capital requirement was $18.342 billion. Fannie Mae's total capital of $38.762 billion on that date exceeded the risk-based capital requirement by $20.420 billion. 

Fannie Mae's capital classification is based on financial information provided by Fannie Mae and the application of accounting policies currently under review by OFHEO. The SEC, based on OFHEO's September 17 "Report of Findings to Date," undertook a review of Fannie Mae's accounting and on December 15 directed Fannie Mae to restate accounting treatments for SFAS 133 and SFAS 91 for previously reported financial statements. The disallowed hedging treatments (SFAS 133) result in an estimated $9 billion cumulative reduction in core capital as of September 30 as disclosed by Fannie Mae. 

“This capital level places Fannie Mae below its minimum capital requirement and results in a classification of significantly undercapitalized,” said OFHEO Director Armando Falcon. “Fannie Mae's critical capital level remains above the required threshold and Fannie Mae continues to meet its risk-based capital requirement.”

OFHEO has directed Fannie Mae to provide OFHEO with a capital restoration plan to bring core capital into compliance with the minimum capital requirement plus a targeted surplus of 30 percent over the minimum capital requirement level, as set forth under OFHEO's agreement with Fannie Mae's board as of September 27.
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Rates for 30-year mortgages increased by 4 basis points to 5.69 percent from 5.65 percent a week earlier. Rates for 15-year mortgages increased by 7 basis points to 5.11 percent, while one-year adjustable-rate mortgages increased by 5 basis points to 4.15 percent.

The Market Composite Index of mortgage loan applications stood at 689.3, an increase of 0.1 percent on a seasonally adjusted basis from 689.0 one week earlier. The MBA seasonally adjusted Purchase Index fell by 3.6 percent to 471.1 from 488.9 the previous week.

The refinance share of mortgage activity increased 48.9 percent of total applications from 46.0 percent the previous week, its highest rate since April. The adjustable-rate mortgage share of activity increased to 34.4 percent from 34.2 percent. The seasonally adjusted Refinance Index increased by 5.7 percent to 1958.2 from 1852.4 one week earlier.

Other seasonally adjusted index activity included the Conventional Index, which increased by 0.3 percent to 1031.1 from 1027.6 the previous week; and the Government Index, which fell by 4.2 percent to 118.7 from 123.9 the previous week.

The survey covers nearly 50 percent of all U.S. retail residential mortgage originations, and has been conducted weekly since 1990.  Respondents include mortgage bankers, commercial banks and thrifts. 
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