Fannie Mae Agrees to Put in New Controls
March 9, 2005
Fannie Mae Agrees in Second Deal With Regulators to Put in New Accounting Controls
WASHINGTON (AP) -- In a second accord with federal regulators, embattled Fannie Mae has agreed to set up new policies to prevent faulty accounting, split its chairman and CEO position into two jobs and create a new office to hear complaints from company employees.
The biggest U.S. buyer of home mortgages announced an agreement Tuesday with the Office of Federal Housing Enterprise Oversight, which supervises Fannie Mae and has been investigating its accounting.
OFHEO Director Armando Falcon said in a statement, "We must put in place all necessary reforms, not just to correct the problems of the past, but to also safeguard against problems emerging in the future."
Fannie Mae Chairman Stephen Ashley voiced support for the pact, saying the company was committed to its terms "as we continue the process of completing the restatement and re-audit of our prior financial statements."
OFHEO last year found serious accounting problems at the government-sponsored company as well as a pervasive pattern of earnings manipulation and lax interrnal controls. The Securities and Exchange Commission ordered Fannie Mae in December to restate its earnings back to 2001, a correction estimated at $9 billion. The company's chief executive and chief financial officer were forced out by the board of directors in December.
In late September, after the accounting problems came to light, Fannie Mae agreed under pressure from OFHEO to boost its capital cushion against risk by some $5 billion, revamp its accounting and tighten its internal controls.
Last month, OFHEO 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 agency had identified internal control deficiencies at the company "that it believes raise safety and soundness concerns," according to Fannie Mae.
The new agreement, which was signed Monday, calls for the company to take a series of steps to correct inadequacies in internal controls, corporate governance and accounting systems, even as the regulators' investigation continues.
The steps include new policies to prevent the falsification of signatures in accounting ledgers, correcting deficiencies in the company's mortgage-portfolio accounting systems and separating the chairman and CEO jobs -- a split that had been resisted by the ousted chief executive, Franklin Raines. The new Office of Compliance and Ethics will review internal complaints and the company's general counsel will report misconduct or suspected misconduct directly to the board.
Fannie Mae and Freddie Mac, its smaller rival in the $8 trillion home-mortgage market, were created by Congress to pump money into the home-mortgage market. They buy and guarantee repayment of billions of dollars of home loans each year from banks and other lenders, then bundle them into securities that are resold to investors worldwide.
In trading Tuesday, Fannie Mae shares fell 51 cents to close at $57.49 on the New York Stock Exchange, near their 52-week low of $56.45.
Copyright Associated Press