Fannie Mae: New Accounting Issues Found

Fannie Mae (FNM) Wednesday said its regulator has identified new issues with the mortgage giant's accounting, raising fresh questions about how big its problems may become before they are resolved.

The new issues stretch down to the very base of Fannie's accounting practices, analysts said, noting problems with journal entries and Fannie's decision to start a "bottom-up" review of its accounting functions.

The problems also may impact the size of Fannie's earnings restatement, which the company first estimated at $9 billion based on accounting problems previously disclosed. Fannie would not comment on how the new accounting questions raised by its regulator would impact the company's restatement.

"Finding more issues in the accounting realm is truly not a positive," said Ed Groshans, analyst at Fox-Pitt, Kelton in New York.

Fannie's regulator, the Office of Federal Housing Enterprise Oversight (search), or OFHEO, has found policies that appear inconsistent with generally accepted accounting principles as well as internal control deficiencies, Fannie said.

The concerns raised by OFHEO relate to securities accounting, loan accounting consolidations and practices to smooth certain income and expense amounts.

OFHEO's questions about Fannie Mae's accounting have grown to include issues with at least five accounting standards. Previously, accounting concerns assessed by the Securities and Exchange Commission (search) revolved around two such standards.

Investigations by OFHEO, the SEC and the Justice Department remain open.

Shares of Fannie Mae dropped to $56.50, a low not seen since 2000, before clawing back to trade up 2 cents at $57.81 on the New York Stock Exchange.

Fannie Mae, and sister government-sponsored enterprise Freddie Mac (FRE), are publicly traded companies but are charged by Congress with increasing home ownership by ensuring a liquid mortgage market.

The GSEs buy mortgages from originators and package them as mortgage-backed securities. They also keep mortgages in their portfolios as whole loans or securities. In 2003, the GSEs accounted for 47.2 percent of total residential mortgage debt outstanding, their regulator said.

Both companies have had multibillion-dollar accounting problems, and face the possibility of stiffer federal oversight and new restrictions on their business as Congress weighs legislation to rein them in.

Accounting errors have left Fannie undercapitalized by the standards set by regulators, and OFHEO has ordered the company to take steps to boost capital. In January, that included halving its dividend and halting cash bonuses for executives.

On Wednesday, Fannie said OFHEO approved a capital restoration plan that gives the mortgage finance giant until Sept. 30 to hit a 30 percent capital surplus target.

To meet that target, Fannie Mae said it would reduce its portfolio through mortgage liquidations and increase core capital through retained earnings. The company also said it would cut costs and sharply curtail its advertising campaign and use of political consultants.

A Fannie spokesman declined to comment on the size of those spending reductions, or if any jobs would be cut.

Fannie Mae must give its regulator a plan to fundamentally restructure and strengthen the company's financial and risk management organization by Feb. 25.