US home loan chief fired over audit inquiry

The American economy was given a jolt yesterday when the second largest mortgage financier, Freddie Mac, announced the departure of its top three executives amid an accounting scandal.

The surprise departures at the top of the company sparked serious fears over the management of its $1.3 trillion (£709bn) portfolio. The company holds 40% of the outstanding mortgages in the US with rival Fannie Mae.

Freddie Mac was set up by Congress in 1970 to create a steady and larger supply of funds to mortgage lenders. It buys mortgages and repackages them as securities that it sells to investors on Wall Street.

Its importance to the US economy was underlined as the dollar weakened and the Dow Jones industrial average dropped below 9,000 in afternoon trading yesterday.

Earlier this year, the Federal Reserve chairman, Alan Greenspan, sounded alarm bells when he said he was concerned that Freddie Mac and Fannie Mae might not have adequate capital.

The government agency that regulates Freddie Mac and Fannie Mae said it was sending officials into the company to start an investigation. The agency said the management shake-up "only goes part of the way toward correcting serious problems".

Shares in Freddie Mac fell 13% by midday to $52, dragging mortgage providers and homebuilders lower with them.

The company said it had fired president and chief operating officer David Glenn for not fully cooperating with a review of its earnings statements between 2000 and 2002. Freddie Mac said in January it would restate its numbers for those years after hiring a new auditor to replace the now defunct Arthur Andersen.

The new auditor, PricewaterhouseCoopers, recommended it bring forward earnings from derivatives used heavily by the company to hedge against swings in interest rates.

The government-chartered company also announced the retirement of chairman and chief executive Leland Brendsel and the resignation of the chief financial officer, Vaughn Clarke.

The company added that Mr Glenn had been fired "because of serious questions as to the timeliness and completeness of his cooperation and candour with the board's audit committee". But it said it had not yet found any evidence of fraudulent behaviour.

Freddie Mac came under pressure when the agency that regulates the company, the office of federal housing enterprise oversight, sent a letter to the board at the weekend criticising management controls.

The company named Gregory Parseghian as replacement chief executive.