Fannie, Freddie facing subpoenas

WASHINGTON — Adding to their woes, mortgage finance giants Fannie Mae and Freddie Mac are facing a federal grand jury investigation into their accounting practices.

The mortgage finance companies said Monday that a federal grand jury in New York is investigating accounting, disclosure and corporate governance issues at Freddie, based in McLean, Va., and Washington-based Fannie.

Fannie and Freddie said they received subpoenas Friday from the U.S. Attorney's office in Manhattan as well as requests from the Securities and Exchange Commission that they preserve documents. Fannie Mae and Freddie Mac were taken over by the government earlier this month as their mounting defaults and foreclosures threatened the entire mortgage market.

The government investigation focuses on activities starting in 2007, Freddie Mac said in a statement.

Critics have long questioned the companies' bookkeeping. Last November, for example, a Fortune magazine story said new accounting procedures at Fannie Mae masked potential losses on bad loans.

And several years ago, both Fannie and Freddie were forced to restate billions in earnings after federal regulators discovered accounting irregularities at both companies.

The scandals led to the replacement of the companies' top executives. Freddie Mac's former CEO, Gregory Parseghian, was ousted in December 2003. Fannie CEO Franklin Raines and chief financial officer Timothy Howard were swept out of office a year later.

Both companies said Monday they would cooperate fully in the investigations, but their spokesmen declined to comment. Representatives of the SEC and Justice Department also declined to comment.

Three weeks ago, the government seized control Fannie Mae and Freddie Mac, the two biggest U.S. mortgage finance companies, with a rescue plan that could require the Treasury Department to inject as much as $100 billion into each to keep them afloat.

A spokeswoman for the Federal Housing Finance Agency, which controls the companies, said the housing agency, "will work with the companies to assure a smooth and efficient process and will work with the government agencies as they undertake their inquiries."

Law enforcement officials said last week the FBI is looking at potential fraud by Fannie, Freddie and insurer American International Group Inc. Additionally, a senior law enforcement official said failed investment bank Lehman Brothers Holdings Inc. also is under investigation.