NewsMax.com Wires
Wednesday, Jan. 19, 2005

Story Continues Below

  Government regulators approved the dividend cut.

To make up the anticipated shortfall, Fannie Mae needs to sell part of its portfolio of mortgages, raise fresh capital by issuing stock or cut dividends - and its spectacular growth of recent years could be curtailed.

Regulators in the Office of Federal Housing Enterprise Oversight ordered the company in September to boost its capital cushion against risk by some $5 billion by the middle of this year.

Referring to the dividend cut, Fannie Mae non-executive chairman Stephen Ashley said in a statement late Tuesday, ``The board of directors believes that this is a prudent and responsible action to take as the company moves expeditiously to increase its capital.''

OFHEO Director Armando Falcon said that the dividend reduction ``demonstrates the board's commitment to taking necessary measures to increase the company's capital.''

Fannie Mae has acknowledged, meanwhile, that it was warned that a North Carolina lender from which it had accepted money was engaging in an improper scheme that defrauded federal housing finance agency Ginnie Mae.

The company agreed in early December to forfeit some $7.5 million in an accord with the Justice Department, which had accused it of accepting money it knew had been lost by Ginnie Mae in a fraud scheme. Washington-based Fannie Mae did not admit wrongdoing in the consent order.

A federal judge in Charlotte, N.C., had previously ordered Fannie Mae to forfeit $6.5 million in the case involving mortgages it purchased from First Beneficial Mortgage Corp., calling the money proceeds of a criminal conspiracy.

The $7.5 million that Fannie Mae agreed to pay represents the $6.5 million ordered by the judge plus about $978,000 in interest. The money will go to Ginnie Mae as partial restitution for the $23 million it is said to have lost as a result of the mortgage fraud scheme carried out from 1998 to 2000.

A federal trial in 2002 in North Carolina showed that now-defunct First Beneficial had defrauded Fannie Mae under a mortgage scheme using phony borrowers and other deceptions. When officials of Fannie Mae, which had paid millions of dollars to buy the mortgages, learned that they were fraudulent, the company demanded that First Beneficial buy them back, the government said. First Beneficial got the money to repay Fannie Mae by using a similar scheme to sell them to Ginnie Mae, it said.

Justice Department attorneys have said Fannie Mae should have told Ginnie Mae the mortgages were bogus.

In his letter to the lawmakers, Fannie Mae interim chief executive Daniel Mudd said a North Carolina banking investigator and two employees of First Beneficial had told Fannie Mae officials in late 1998 that owner James E. McLean appeared to be trying to sell loans to Ginnie Mae in order to repay Fannie.

Mudd said that Fannie Mae has hired an outside law firm to investigate its handling of the matter.

The Justice Department has said it will seek no further funds in the matter from Fannie Mae, which it described in the consent order as ``itself a victim of a mortgage fraud scheme.''

The department said, however, that the order ``does not in any way bind or limit the jurisdiction of, or current or future activities of, any federal, state or local entity.'' Other purported victims of the mortgage scheme could bring legal claims against Fannie Mae, which is the second-largest financial institution in the country behind Citigroup Inc.

McLean, who was the owner and president of Charlotte-based First Beneficial, was convicted in 2002 on federal charges including conspiracy, bank fraud and money laundering. He was sentenced to 21 years in prison and ordered to pay more than $23 million in restitution. His wife, Macy McLean, and Paul Zimmerman and his wife Debbie Zimmerman also were convicted in connection with the fraud scheme.

The case is unrelated to the Justice Department's criminal investigation of Fannie Mae's accounting, which also is under scrutiny by the Securities and Exchange Commission.

Copyright © 2005 The Associated Press

Editor's note: