Fannie Mae – already defending charges that it used improper accounting practices to boost earnings – is being forced to explain to Congress why it did not alert authorities when it discovered that $35 million in bonds in its portfolio were backed by fraudulent loans.

The country’s largest mortgage guarantor is also being asked to explain why, after Fannie Mae executives discovered the fraud, the loans were then sold to another mortgage guarantor, Ginnie Mae.

“We are very concerned that the U.S. taxpayers may have been put at risk when certain loans were sold to Ginnie Mae after many of the same loans were determined to be fraudulent by executives at Fannie Mae,” said a December 1 letter to Fannie Mae’s chief executive, Franklin Raines, signed by House Financial Services Committee Subcommittee chairs Richard Baker, a Republican of Louisiana; Susan Kelly, a Republican of New York; and Robert Ney, a Republican of Ohio.

The letter requests that Mr. Raines respond by January 14.

Multiple calls to Fannie Mae were not returned.

The controversy stems from Fannie Mae’s relationship with Charlotte, N.C.-based mortgage brokers James and Macy McLean, owners of home lending concern First Beneficial Mortgage Company.

From 1994 to 1998, First Beneficial sold $35 million worth of home loans to Fannie Mae, which guaranteed the principal and interest payments in the event of defaults.

The company was part of a Fannie Mae program designed to increase the number of loans guaranteed to minority borrowers.

First Beneficial’s loans began to raise “red flags” at Fannie Mae in 1998, according to court testimony, when a $1 million portfolio of mobile-home loans began to default.

Fannie Mae executives attempting to collect on the properties’ mortgage insurance were told that none had been taken out, according to congressional testimony by Chris Swecker, the Federal Bureau of Investigation agent whose task force uncovered the fraud.

Fannie Mae guaranteed $35 million in loans to First Beneficial’s “clients,” many of whom turned out to be the McLeans, or friends of the McLeans. Moreover, some of the loans were for unfinished homes and vacant lots.

After Fannie Mae demanded repayment, James McLean told the company he didn’t have the money.

However, several weeks later, he wired $964,000 to Fannie Mae after securing financing from Ginnie Mae. McLean, according to testimony, returned $8.7 million in First Beneficial loan guarantees to Fannie Mae between September 1998 and February 2000, using Ginnie Mae loan guarantees.

A HUD Inspector General agent, Mark Heinbach, in an affidavit unsealed last month, said, “Fannie Mae officials were aware that the source of these funds was Ginnie Mae, and that the McLeans had repaid this money to Fannie Mae simply by reselling the fraudulent loan packages to Ginnie Mae.”

Moreover, after Fannie Mae suspended McLean from its minority lending program in 1998, Fannie Mae executives made a conscious decision not to publicize the suspension, according to court testimony.

A Fannie Mae executive, Sam Smith, testified that Fannie “would not publicize any suspension [from Fannie’s minority-lending program], so no one would know he had been suspended.”

Ginnie Mae is reporting a $30 million loss on the loans.

Ginnie Mae’s president, Ron Rosenfeld, said it was the single worst loss Ginnie Mae has ever experienced.

Last month, A U.S. District Court in Charlotte, N.C., ordered Fannie Mae to forfeit $6.5 million in “criminally derived” profits from the loans.

The Mcleans and three conspirators were given jail sentences ranging from two to 21 years.