Fannie Mae Accounting Probe Widens

Federal investigators probing accounting problems at Fannie Mae (FNM) are now questioning how the No. 1 U.S. home finance company treated trusts that it set up to sell securities.

Shares of Fannie Mae tumbled more than 6 percent on the news, briefly dropping $3.28 to $49.96 on Monday before recovering to $50.69, off 4.7 percent on the New York Stock Exchange (search). The stock had not been below $50 since August 2000.

Fannie's U.S. regulator, the Office of Federal Housing Enterprise Oversight (search), said Monday it was investigating the company's use of "qualifying special purpose entities" to account for trusts it uses to issue mortgage-backed securities (search).

That accounting issue is now just one of dozens being reviewed by investigators both outside and inside the company, according to sources close to Fannie Mae.

The magnitude of accounting problems at the company remains unclear. But Fannie has already estimated that problems identified so far could result in a profit restatement of more than $11 billion.

Sources close to the various investigations of the company's accounting say the restatement may be much larger.

Monday, Fannie's regulator said it was examining how the shareholder-owned, government-sponsored housing enterprise accounted for trusts as "qualifying special purpose entities," or QSPEs (search), under Financial Accounting Standard (search) (FAS) 140.

By treating them as "qualifying special purpose entities," Fannie kept the trusts' assets and liabilities off the corporate balance sheet.

OFHEO would not comment on what questions it is raising about Fannie's treatment of the trusts, saying only that it was looking at Fannie's employment of FAS 140.

"QSPEs are one of a number of issues OFHEO is looking at," said Corinne Russell, spokeswoman for OFHEO.

The trusts are used by Fannie Mae to issue mortgage-backed securities, which it creates by purchasing mortgages in the secondary market and then putting them into trusts for sale as mortgage-backed securities.

If regulators find Fannie should have accounted for those trusts on its balance sheet, it would substantially boost the amount of capital the company must hold, as its capital cushion is determined in part by the total assets on its books.

The investigation by OFHEO first focused on Fannie's compliance with two sets of accounting rules -- Financial Accounting Standards (FAS) No. 91 on accounting for fees and costs associated with originating or acquiring loans, and FAS 133 on accounting for derivatives and hedging activities.

The Securities and Exchange Commission (search) in December agreed with OFHEO, saying Fannie's accounting failed to comply with those standards.

But problems did not stop there.

In March, Fannie said its regulator had found more problems with the company's accounting and that questions have grown to include issues with at least five accounting standards.

The regulator also has found instances in which Fannie Mae employees falsified signatures on accounting ledgers and made changes to earnings-related records without following proper procedures.

OFHEO Monday moved to tighten corporate governance at Fannie and sister government-sponsored housing enterprise Freddie Mac by issuing a new rule to place some restrictions on executive compensation and new limits on the tenure of directors on the board.

Those changes, OFHEO said, stemmed from its investigations of the companies.