- The Washington Times - Monday, April 4, 2005


Federal regulators’ investigation of Fannie Mae’s accounting has taken a new avenue as they examine whether the mortgage giant failed to properly account for thousands of trusts it created whose assets are kept off its balance sheet.

Fannie Mae’s stock fell $1.78, or 3.3 percent, to close at a four-year low of $51.46 yesterday on the New York Stock Exchange. It was the lowest closing price since Aug. 3, 2000.

District-based Fannie Mae uses the trusts to issue securities backed by the billions of dollars of home mortgages annually that it buys from lenders and bundles together for resale to investors worldwide.

The government-sponsored company, which is the largest U.S. buyer and guarantor of home mortgages, recently was ordered by the Securities and Exchange Commission to restate its earnings back to 2001, a correction that could reach an estimated $11 billion. Another federal agency, the Office of Federal Housing Enterprise Oversight, also has been investigating Fannie Mae’s accounting since last year. It found that the company violated rules related to derivatives, financial instruments that it uses to hedge against swings in interest rates.

OFHEO has given Fannie Mae until Sept. 30 to boost its capital cushion against risk by 30 percent, or about $5 billion.

Last month, Fannie Mae disclosed that it would miss the March 31 SEC deadline for filing its financial report for 2004 and may have to record an additional loss of $2.4 billion. In addition, the discovery of falsified signatures raised the possibility of criminal activity by company employees.

Now comes the disclosure that the OFHEO regulators also are scrutinizing the company’s accounting for the trusts.

“This is one issue of many that we are looking at in our special examination of Fannie Mae,” OFHEO spokeswoman Stefanie Mullin said yesterday.

Fannie Mae spokeswoman Janis Smith declined to comment.

Fannie Mae collects fees from the banks and other lenders that sell it mortgages for guaranteeing loan payments in the event of default by homeowners. The assets and liabilities of the trusts issuing the mortgage-backed securities are not recorded on Fannie Mae’s balance sheet because it has deemed them to be so-called qualifying special purpose entities under its interpretation of accounting rules.

Also yesterday, OFHEO submitted for publication in the Federal Register a corporate governance rule that it said toughens the current regulations “and reduces the potential for future corporate misconduct at Fannie Mae and Freddie Mac,” the No. 2 player in the $8 trillion home mortgage market, which also is government sponsored. The rule, which covers areas including company operations, code of conduct and executives’ compensation, will take effect after it is published in the federal compendium.

McLean-based Freddie Mac has emerged from its own accounting scandal and executive shake-up after disclosing in June 2003 that it misstated earnings by $5 billion for 2000-2002.

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