Fannie Mae lenders are hoping to shift the focus toward improving affordable housing financing programs now that Fannie Mae finally has settled a two-year regulatory battle with the Office of Federal Housing Enterprise Oversight (OFHEO). They expect few lingering effects from the settlement and think the end of the dispute will free Fannie staff to refocus on improving loan programs.

The government-sponsored enterprise agreed in the May 23 settlement to take action on all of the recommendations in the OFHEO report, including addressing accounting practices, internal controls, corporate culture, disclosure, and oversight of corporate activities. Fannie also agreed to limit the growth of its mortgage portfolio to a level to be set by OFHEO and Fannie Mae, and it agreed to pay a $400 million civil penalty. Fannie Mae noted that it was neither admitting nor denying any wrongdoing.

The report singles out former Fannie Mae CEO Franklin Raines and former Chief Financial Officer Timothy Howard as the leaders who principally directed and profited from the mismanagement. But others, including the company’s board of directors and various internal committees, also were reprimanded for failing to detect or stop the abuse. Raines and Howard both resigned from Fannie Mae in late 2004.

Stephen B. Ashley, chairman of Fannie Mae’s board, said in a statement that the settlement “builds on some of the changes and progress we have made over the past 18 months to rebuild the company and restore the confidence of our shareholders and stakeholders.”

Considering that Fannie Mae has been reviewing its entire multifamily business looking for ways to improve it, borrowers might be more interested in what Fannie’s lender partners will roll out next than in the effects of the accounting scandal. But some big borrowers will need to make sure they have at least inquired about Fannie Mae’s stability and ongoing strength before signing another deal.

“An [executive at a] publicly traded real estate investment trust wants to have that box checked just in case somebody says, ‘Why are you doing business with Fannie Mae?’ He’s going to need to have an answer,” said Howard Smith, president of Green Park Financial, a Fannie Mae Delegated Underwriting and Servicing (DUS) lender. But for a typical suburban borrower making use of Fannie Mae’s multifamily flow business, “it’s probably not on his radar screen,” he added.

“Some customers have queried us and asked what does this mean to them as far as Fannie Mae being a source of product, and my response is that it’s going to have no impact,” said Howard J. Levine, president and CEO of DUS lender ARCS Commercial Mortgage. “If anything, it will make Fannie Mae a more sensitive and efficient organization, and that’s exactly what’s happening.”

Daniel Mudd, Fannie Mae’s president and CEO, said in a statement that the company still has much work to do, including completing its restatement of financial results. “A lot of people are counting on us to build a company that is worthy of our public purpose to help the housing finance system serve affordable housing,” he added.

The settlement brings good and bad news for affordable housing, said Chris Tawa, senior vice president of MMA Financial’s Affordable Debt Group. “The good is that it’s absolutely going to focus Fannie Mae on the mission of achieving its affordable goals and on flexibilities within the program so they can help facilitate the business. And bad because the portfolio purchases of loans is crucial in the affordable arena, and limiting that could affect the availability of Fannie Mae’s financing for this area.”

With the OFHEO investigation behind it, said Levine, Fannie will be able to focus better on removing bureaucracy from the transaction process and on addressing some solid multifamily niches such as affordable housing, infill housing, rehabilitations, and small loans. "I think they're in the final stretch of the race to finalize their accounting reporting, so that means all of the resoruces that have been devoted to that issue can now be redirected to market share, new product design, processes, and so forth," said Levine.

The U.S. Senate is still considering legislation to tighten regulation of Fannie Mae and Freddie Mac, but observers are divided over whether the settlement with OFHEO will speed up the legislation or if Congress is too preoccupied with election-year issues to be able to act on the bill before the year is out.