- The Washington Times - Monday, March 13, 2006


As it continues to peel through the onionlike layers of its $11 billion faulty accounting, D.C.-based mortgage company Fannie Mae disclosed yesterday that it found more errors in its government-ordered review.

The government-sponsored company, which finances one of every five home loans in the United States, said it had made “substantial progress” toward completing its accounting review but will miss a regulatory deadline for filing its annual financial report for the second straight year.

Top company executives sought to assure investors that all focus and energy were not being engulfed by the massive reworking of Fannie Mae’s books and that new avenues of business were being pursued in an increasingly competitive U.S. mortgage market. Some high-level executives have been “walled off” from the work of the accounting review, they said.

“There’s huge demand out there …,” President and Chief Executive Officer Daniel Mudd said in a conference call with analysts. “[We] feel good about the position that we occupy.”

As the record housing market of recent years shows signs of cooling, Mr. Mudd said, the company expects home sales to decline about 8 percent this year from last.

Fannie Mae also said that it expects an upcoming internal report to show that the company’s financial controls remained insufficient as recently as the end of last year.

Federal regulators in 2004 accused Fannie Mae of serious accounting problems and earnings manipulation to meet Wall Street targets, and the Securities and Exchange Commission ordered the company to restate earnings back to 2001 — a correction expected to reach an estimated $11 billion. The Justice Department is pursuing a criminal investigation.

Fannie Mae, the second-largest U.S. financial institution after Citigroup, does not expect to complete the massive reworking until the latter half of this year. The company said in its SEC filing yesterday that it has completed “the process of identifying accounting issues for review.”

“We’ve made substantial progress in our accounting review,” said Mr. Mudd, who took the helm of Fannie Mae after the accounting scandal swept out CEO Franklin Raines and Chief Financial Officer Timothy Howard in December 2004.

“It’s not as fast as I want” but is moving at the disciplined pace required, Mr. Mudd added.

While it struggles to untangle its accounting, Fannie Mae’s share of the multitrillion-dollar home mortgage market has eroded as competition heats up from big banks and mortgage loan companies. The company reported yesterday that its portion of the market for home loans that are bundled into securities and sold to investors dropped to about 24 percent last year from 29 percent in 2004 and 45 percent in 2003.

Fannie Mae said the newly disclosed accounting errors are in areas including certain loans, investment securities, guaranty fees charged to banks and other mortgage lenders, houses acquired through foreclosures, interest on delinquent home loans, and reverse mortgages. The company did not provide an estimate of the amounts of the errors.

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