As Congress debates whether to strip it of much of its role overseeing Fannie Mae and Freddie Mac, the Department of Housing and Urban Development is launching a “comprehensive review and evaluation” of the government-sponsored lenders’ investments.

Investigations into accounting and management scandals at Freddie Mac and Fannie Mae led the companies to restate earnings by a combined $16 billion and pay more than $500 million in fines. The Office of Federal Housing Enterprise Oversight, which is responsible for verifying that Fannie and Freddie’s investments are sound, has overseen those investigations.

HUD’s review of Freddie and Fannie will determine whether some of the companies’ investments are inconsistent with their mandated role, which is to support affordable housing and provide stability to the mortgage market by repurchasing loans from originators. OFHEO Director James Lockhart has said the government-sponsored entities, or GSEs, are invested too heavily in their own mortgage-backed securities, and that less than 30 percent of their portfolios contribute to affordable housing.

In a June 14 letter, HUD officials notified Fannie and Freddie of their “intention to investigate a range of investments, including partnerships, notes receivable, and equity investments, with a focus on investments that lack transparency on the GSEs’ financial statements,” according to a statement HUD issued Thursday.

HUD will determine “whether investment activities that were not initiated as part of the GSEs’ residential mortgage purchase, guaranty and securitization programs are authorized activities consistent with their charter authorities and public purposes,” the statement said. “HUD will also examine the extent to which these investments are subject to the internal investment guidelines approved by each GSE’s board of directors.”

HUD this week scheduled separate meetings with Freddie and Fannie “to launch its comprehensive review and evaluation of their investment activities,” the statement said.

HUD has general regulatory authority over Fannie and Freddie, duties Lockhart says should be taken over by an independent oversight agency that would determine the GSE’s mission and products. HUD would continue to play a role as a member of the new agency’s board. A bill passed by the House last year and one making its way through the Senate would create a Federal Housing Finance Agency (FHFA), with powers similar to those given to bank regulators.

Also Thursday, the Treasury Department official who has overseen the Bush administration’s efforts to reform Fannie and Freddie announced plans to leave his post when Congress adjourns.

In his resignation letter, Undersecretary for Domestic Finance Randal K. Quarles said he had informed the administration of his plans to return to the private sector in 2006 at the time he was appointed to the position, at the onset of Bush’s second term. During Bush’s first term, Quarles served as assistant Treasury secretary for international affairs.

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