The Mortgage Twins’ Demise: Looking Beyond Financial Reporting Fraud at Fannie and Freddie

by Barry Epstein

Fannie Mae (Federal National Mortgage Association, or FNMA) and Freddie Mac (Federal Home Loan Mortgage Corporation, or FHLMC), the formerly government-sponsored, now government-owned, entities that were created to provide liquidity to the mortgage markets and to support social goals relative to housing availability and affordability, have not presented sympathetic images in recent years.

After literally decades of warnings (particularly from the Wall Street Journal’s editorial pages) regarding the huge risks that FNMA’s and FHLMC’s implicit government guarantees had created for taxpayers, the bursting of the housing bubble caused these enterprises to become official wards of the Federal government, in which status they have already cost taxpayers some $153 billion, with more losses anticipated to come.

Albeit with the benefit of hindsight, it seems crystal clear to many that FNMA’s and FHLMC’s portfolios of loans, mortgage derivatives, and guarantees were riskier than had generally been perceived – and that these entities’ financial statements had not appropriately disclosed these risks to shareholders and others. Indeed, the SEC has recently sent so-called "Wells notices" to former executives, alerting them to the fact that they might be targeted in civil actions, and rumor has it that even FNMA and FHMLC themselves (i.e., the companies, not just the former executives) might be named in forthcoming complaints.

But is it really so obvious that financial reporting by these behemoth organizations had been flawed, perhaps even fraudulently so? A revisiting of the financial statements filed by FNMA and FHLMC suggests that this may not necessarily have been the case.

A first, but fairly detailed, review of the FNMA’s 2007 financial statements does not reveal any failure to report the mandated information, and cautionary language is found in abundance, including about the yet-unknown outcomes of ratings reviews. While some technical reporting deficiencies may be found to have existed, it appears to this writer that the fault for FNMA’s and FHLMC’s respective collapses – and many contributing causes could be readily recited – does not prominently include financial reporting fraud.

Substandard financial reporting certainly exists, and failed audits are legion, but not every failure can be attributed to fraudulent financial statements and/or auditor negligence. When politically imposed-upon private (at least, nominally so) enterprises are forced to implement government-mandated social or economic policies, accuracy in financial reporting sometimes suffers the consequences. Financial reporting aberrations, even if they are found to exist, may thus be more a symptom than a cause. It may be that the FNMA and FHLMC collapses will ultimately be found to have exemplified this phenomenon. Read the full story for more details.

ABOUT THE AUTHOR: Forensic accountant Barry Jay Epstein, Ph.D., CPA, CFF, is a partner at Russell Novak & Company LLP ( in Chicago. He is the author of The Handbook of Accounting and Auditing, published by RIA, the tax and accounting business of Thomson Reuters. Dr. Epstein served as the lead author of 26 annual editions of Wiley GAAP (1985 through 2010) and 14 annual editions of Wiley IFRS (1997 through 2010), all published by John Wiley & Sons. He is also a consulting expert on GAAP, auditing standards, and financial reporting matters. He can be reached at or 312-464-3520.

LOADING PDF: If there are any problems, click here to download the file.

Written by:

Barry Epstein

Epstein + Nach LLC on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at:

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.