Regulators didn’t challenge Freddie’s accounting

WASHINGTON — An outside investigator early last year told regulators that Freddie Mac failed to properly document interest rate bets, but the government didn’t challenge the mortgage finance company’s accounting practices.

The Federal Housing Finance Agency confirmed that it did not request a change in accounting practices after receiving the report from investigator Kroll Inc. The report concluded that Freddie Mac “failed to satisfy certain documentation elements” of accounting rules relating to the derivative bets made from 2002 to 2004, the agency said in a statement.

The Wall Street Journal reported earlier Thursday that the FBI was examining the February 2008 report requested by the housing finance agency, which oversees Freddie Mac and sibling company Fannie Mae. An FBI spokeswoman declined to comment.

Freddie Mac and its auditors “strongly disagreed” with the report, and provided an analysis indicating that the interest rate bets were effective, the housing agency said. After that analysis, the agency says it did not protest McLean, Va.-based Freddie Mac’s accounting.

Michael Cosgrove, a Freddie Mac spokesman, said the company’s accounting “was appropriate and followed all the applicable guidance.”

Meanwhile, federal prosecutors in Virginia and the Securities and Exchange Commission have been investigating Freddie Mac’s accounting and disclosure practices, interviewing employees and reviewing company documents, Freddie Mac said in a SEC filing in March. The investigation started in September, when Fannie Mae and Freddie Mac were seized by government regulators amid mounting losses from the mortgage crisis.

Both Freddie Mac and Fannie Mae use derivatives — contracts whose value is determined based on the value of everything from stocks to interest rates to commodities — to manage, or hedge, their risk from large swings in interest rates. How to account for those derivatives has been a long-running issue.

The two companies, which own or guarantee about 31 million home loans, also have long been beset with controversy over their accounting practices.

Washington-based Fannie Mae and Freddie Mac were forced to restate billions in earnings after federal regulators discovered accounting irregularities at both companies that led to the replacement of top executives. Last fall the government appointed a new set of executives after concluding that losses from the mortgage crisis threatened the companies’ financial health.