- The Washington Times - Wednesday, February 23, 2005


Federal regulators investigating the accounting of embattled Fannie Mae have discovered additional problems, including serious deficiencies in internal controls, the mortgage giant disclosed yesterday.

An eight-month investigation by the Office of Federal Housing Enterprise Oversight, which supervises Fannie Mae, last year found serious accounting problems at the biggest U.S. buyer of home mortgages, as well as a pervasive pattern of earnings manipulation and lax internal controls. The Securities and Exchange Commission ordered the government-sponsored company in December to restate its earnings back to 2001, a correction estimated at $9 billion. Fannie Mae’s chief executive and chief financial officer were forced out by the board of directors.

Now OFHEO, whose examination is continuing, has informed Fannie Mae’s board of additional problems including accounting for securities and loans, and practices to spread the impact of income and expenses over time, the company said in a statement. It said the agency had identified internal-control deficiencies at the company “that it believes raise safety and soundness concerns.”

“Fannie Mae’s board and management are addressing the issues and questions,” the statement said. “Fannie Mae will report to OFHEO regarding each of these issues, and will continue to work with OFHEO to resolve these matters as part of the company’s ongoing internal reviews and its restatement process.”

In September, the regulators ordered Fannie Mae to boost its capital cushion against risk by 30 percent, or some $5 billion, by the middle of this year.

The company said yesterday that the agency had extended that deadline until Sept. 30.

Spokesmen for OFHEO had no immediate comment.

Washington-based Fannie Mae has been shrinking its loan portfolio even faster than expected as it prepared to meet the original June deadline. Its spectacular growth of recent years could be curtailed.

The company said Monday that its gross portfolio, which includes both its own investments and mortgage-backed securities it guarantees that are held by other investors, fell to $890 billion at the end of January from $904.6 billion in December, for an annualized rate of decline of 16.8 percent.

By comparison, Fannie Mae’s mortgage portfolio fell at an annualized rate of 10.1 percent in December, bringing growth for 2004 as a whole to 0.7 percent, compared with 2003’s 13.1 percent pace.

The company also has raised fresh capital by issuing $5 billion in preferred stock and slashed its first-quarter dividend payout by half, to 26 cents per share, to make up its anticipated shortfall.

On Tuesday, OFHEO said it had proposed requiring Fannie Mae and Freddie Mac, its smaller rival in the $8 trillion home-mortgage market, to promptly report mortgage fraud or suspected fraud to the government and to establish internal controls to detect it. The action followed the defrauding of U.S. housing finance agency Ginnie Mae.

In addition, OFHEO Director Armando Falcon ordered Fannie Mae and Freddie Mac to notify the agency of any government investigations or civil or criminal actions, or lawsuits by private parties such as shareholders.

Freddie Mac disclosed in June 2003 that it had understated profits by some $4.5 billion for 2000 to 2002 in an effort to smooth earnings.

The two companies, created by Congress, pump money into the home-mortgage market by buying and guaranteeing repayment of billions of dollars of home loans each year from banks and other lenders, then bundling them into securities that are resold to investors worldwide.

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