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Regulators order U.S. mortgage giant Fannie Mae to revamp accounting to reflect losses

May 7, 2004

By Marcy Gordon
AP Business Writer

WASHINGTON (AP) -- Federal regulators ordered government-sponsored mortgage giant Fannie Mae to promptly revamp its accounting to more closely reflect losses on some investments, saying its accounting has violated standard principles in some instances.

The sharp action Thursday by the Office of Federal Housing Enterprise Oversight may force the company to restate its earnings. It capped a period of intensifying scrutiny by regulators of Fannie Mae, following an accounting scandal that erupted at smaller rival Freddie Mac last spring.

"Fannie Mae improperly accounted for these assets in a way that fails to reflect losses," OFHEO Director Armando Falcon wrote in a letter to Franklin Raines, Fannie Mae's chairman and chief executive. "... We will take the necessary steps to correct this."

Fannie Mae, the second-largest U.S. financial institution behind Citigroup, was given until May 14 to recalculate the losses in investments in mobile homes and aircraft leases and to revamp its financial statements accordingly.

"We will be submitting the information required within the timeframe requested," Fannie Mae spokesman Chuck Greener said in a statement.

The company disputed the regulators' contention that its accounting in some instances violated generally accepted accounting principles. Greener said its outside auditor, KPMG, agrees with Fannie Mae that its accounting does comply.

At the same time, Fannie Mae has appealed to another federal regulator, the Securities and Exchange Commission, and sought its endorsement of its accounting.

"The SEC is working cooperatively with OFHEO just like we would with any other financial regulator," SEC spokesman Matt Well said Thursday.

In another blow to Fannie Mae and Freddie Mac, an analyst at credit-rating agency Standard& Poor's said the company no longer has "the same degree of confidence" that the government would intervene in a financial crisis involving either one of them and ensure payments to their debtholders.

In a changed government climate, calls for tighter regulation of the two companies have emanated from the White House and Congress. And Federal Reserve Chairman Alan Greenspan warned recently that they could pose a threat to the U.S. financial system if their ability to assume new debt were not restrained.

In October, Fannie Mae disclosed a $1.2 billion accounting error for the third quarter, which it said was due to a change in accounting rules and did not affect net income.

Some critics say that Fannie Mae does not adequately hedge against swings in interest rates.

Fannie Mae and Freddie Mac were created by Congress to pump money into the home mortgage market by buying home loans from lenders and packaging them as securities for sale on Wall Street. They have grown explosively in recent years and now stand behind $4 trillion of home mortgages, representing more than three-fourths of the single-family mortgages in the country.

Copyright Associated Press

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