Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) are masking billions of dollars of potential losses on delinquent loans, a government auditor observed.

Fannie Mae

According to Steve Linick, inspector general for the Federal Housing Finance Agency, a recent accounting change could have a material impact on the two government-sponsored enterprises’ finances and suggested immediate implementation.

FHFA gives Fannie Mae and Freddie Mac to 2015

Both Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) are overseen by FHFA. The regulator ordered the GSEs in April 2012, to adopt the standard practice of writing off all loans delinquent for at least 180 days. However, the two companies previously hadn’t charged off all loans in that category. Subsequently, FHFA gave them until January 2015 to comply with the requirement.

However, Steve Linick feels three years appears to be an inordinately long period to fully implement.

Defending FHFA’s earlier action, Deputy Director Jon Greenlee said in an August 9th response to Steve Linick that the longer timeline is necessary to accommodate “considerable changes to systems and operations that could take time to complete in a safe, sound and well-controlled manner.”

Billions of write offs

According to Steve Linick, the accounting change would “charge off billions of additional dollars related to loans”.

Further, Steve Linick indicated the GSE’s haven’t publicly disclosed the accounting changes.

However, the two GSEs have indicated the coming accounting change in public disclosures filed with the Securities and Exchange Commission.

Bill to replace FHFA

Earlier, Sens. Bob Corker, R-Tenn., and Mark Warner, D-Va introduced a bipartisan Senate bill to replace the FHFA, the conservator of Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC), with a government agency, the Federal Mortgage Insurance Corporation. The proposed FMIC is expected to perform the same way the Federal Deposit Insurance Corporation that guarantees bank deposits to prevent bank runs.

Republicans in the House of Representatives, led by Jeb Hensarling of Texas, are working on a bill that would eliminate the two mortgage giants and limit government involvement in housing finance to the mortgage insurance provided by the FHA.

The government put the two mortgage giants into conservatorship almost five years ago.

Thanks to a reversal of fortunes in the mortgage industry, the mortgage giants have made strides in paying back the bailout money they received from the government.