This year, June may be the cruelest month for Freddie Mac. Two weeks after it abruptly announced the departures of top executives Leland Brendsel, David Glenn, and Vaughn Clark, the mortgage giant disclosed the details--and projected amount--of its expected earnings restatement.

The figure? Anywhere from $1.5 billion to $4.5 billion, according to a June 25 conference call where Freddie's new management discussed the massive upward adjustment. During the call, new CEO Gregory Parseghian attributed the restatement to the "lack of sufficient accounting expertise and internal control and management weaknesses, as a consequence of which Freddie Mac personnel made numerous errors in applying [generally accepted accounting principles]."

(The restatement stems from Freddie's ongoing reaudit of its 2000, 2001, and 2002 books. The company began the process after its new auditors earlier this year disagreed with Freddie's treatment of derivatives, which are financial instruments used by Freddie and Fannie Mae to protect themselves against interest rate fluctuations on mortgage loans in their portfolios.)

But the accounting errors Freddie and its auditors discovered weren't solely mistakes--they included "certain capital market transactions and accounting policies [that] had been implemented with a view to their effect on earnings in the context of Freddie Mac's goal of achieving steady earnings growth," according to Parseghian.

In other words, to smooth earnings and make Freddie more attractive to Wall Street.

It represented yet another day in the hot seat for the McLean, Va.-based company, which has been at the center of accounting and management controversy since early June. Despite the headlines, housing groups, including the NAHB, have declined to comment publicly about the Freddie situation as they watch and wait for the results of the reaudit. "We're neither rushing to judgment nor assuming the worst," says George Griffin, manager of regulatory and industry relations for the National Association of Realtors.

Luckily for builders, Freddie's revelations have had little effect on the housing market itself, but its disclosures have raised questions regarding the effectiveness of its regulator, the Office of Federal Housing Enterprise Oversight (OFHEO).

Just days before Freddie's June 9 news about its leadership shakeup and related accounting issues, OFHEO submitted its annual report on Fannie and Freddie to Congress. Among its findings: Freddie Mac managed interest rate risk appropriately and "[d]erivative instruments are used prudently and in accordance with the standards used by other large financial intermediaries."

"What in the world has OFHEO been doing?" asks James Barth, senior fellow at the Milken Institute in California and former chief economist at the federal government's Office of Thrift Supervision. "I don't think OFHEO has done a particularly good job, because they seem totally surprised by what's happened. That's disturbing, because their sole mission in life is to oversee Fannie Mae and Freddie Mac."

Some have suggested that OFHEO, which has a reputation for being slow to act, has simply been outgrown by the companies it oversees. The agency is small; its annual budget (which comes from fees paid by Fannie and Freddie, not taxpayer dollars like other federal agencies) is about $32 million, compared to $10 billion in combined core net income for Fannie and Freddie last year.

U.S. Rep. Richard Baker (R-La.) has one solution: move OFHEO from HUD to the Treasury Department, where Fannie and Freddie would theoretically be overseen by an agency with more clout. It's the latest version of an idea Baker has floated before, but with little success. In the past, he has proposed moving OFHEO to the Federal Reserve Board.