- The Washington Times - Wednesday, December 22, 2004


The forced departure of Franklin D. Raines as chief executive officer of Fannie Mae hardly ends the turmoil at the nation’s second-largest financial institution.

Civil, criminal and congressional investigations are under way as the mortgage giant’s interim managers begin what could be a lengthy process of cleaning up the books and re-establishing its credibility.

But in good news for consumers, analysts said yesterday they did not believe Fannie Mae’s troubles would cause any disruptions in the nation’s $8 trillion mortgage market. Fannie Mae accounts for about one-fourth of that market.

“The impact on the average homebuyer will be imperceptible,” said Mark Zandi, chief economist at Economy.com. “The mortgage market is very deep, large and liquid with many global participants who will fill any void created by a less aggressive Fannie Mae.”

Fannie Mae’s board of directors announced Tuesday the departures of Mr. Raines and Chief Financial Officer Timothy Howard after intense negotiations.

The Office of Federal Housing Enterprise Oversight (OFHEO) — the company’s chief regulator — pressured the board to act after the Securities and Exchange Commission disclosed that the company must make accounting corrections that could erase $9 billion of past profit going back to 2001.

On an interim basis, Mr. Raines will be replaced by Daniel H. Mudd, currently the company’s chief operating officer, while Robert J. Levin will serve as interim chief financial officer as Fannie Mae works with an outside search firm to find permanent replacements.

The new executives face a daunting task of dealing with OFHEO’s continuing investigation of its accounting practices as well as a civil investigation by the SEC and a criminal probe by the Justice Department. Shareholder suits have also been filed against the company.

The restatement of possibly $9 billion of past profits — about one-third of the company’s reported profits since 2001 — could force the company to take a variety of actions to deal with what OFHEO said Tuesday was a “significantly undercapitalized” balance sheet, meaning the regulators believe the company lacks the money to cover potential losses. Fannie Mae is second in size only to Citigroup.

Analysts predicted Fannie Mae would consider numerous options for raising capital, ranging from selling off part of its mortgage portfolio to issuing more stock or cutting dividends.

Wall Street reacted with relief yesterday to the management shake-up, pushing Fannie Mae’s stock up by as much as $1.57. or 2.2 percent, to finish at $71.92.

Analysts cautioned against believing that yesterday’s rally in Fannie Mae stock meant investors’ concerns had been settled.

“The problem is that nobody is sure what is still lying in the weeds,” said David Wyss, chief economist at Standard & Poor’s in New York.

Finding out whether there are other accounting issues that have yet to surface could take some time, with some analysts predicting Fannie Mae’s books may not be fully corrected for two years.

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