Fannie Mae May Restate Earnings

U.S. mortgage finance giant Fannie Mae on Monday estimated that its third-quarter profit fell 9%, but delayed formally reporting earnings as it addressed regulators’ allegations of accounting manipulation.

The company also warned that if its accounting for some financial derivatives was incorrect, as its federal regulator has charged, it would have to restate earnings and may report an after-tax $9-billion loss on those transactions between Jan. 1, 2001, and Sept. 30.

The firm put off filing its quarterly financial statement with the Securities and Exchange Commission. In a submission to the securities regulator, Fannie Mae said its outside auditor, KPMG, couldn’t sign off on its financial statements for the most recent period until challenges to the company’s accounting methods were resolved.

Fannie Mae’s regulator, the Office of Federal Housing Enterprise Oversight, said in September that the company had improperly accounted for discounts on securities and for derivatives it used to hedge against interest rate swings.

The company said it continued to believe its current book-keeping policies were consistent with generally accepted accounting principles.

Fannie Mae executives, accompanied by KPMG representatives, argued their case before the SEC on Nov. 5, the company said.

The SEC began a formal probe of the company’s accounting practices last month.

In the meantime, Fannie Mae estimated that its third-quarter profit fell 9%, on a decline in net interest income. The company buys mortgages from lenders and repackages them as securities or holds them in its own portfolio.

Fannie Mae said its unaudited third-quarter net income was likely to drop $251 million to $2.415 billion, or $2.45 a share, compared with net income of $2.666 billion, or $2.69 a share, a year earlier.

Analysts were expecting earnings under generally accepted accounting principles to be $1.87 a share, according to Reuters Estimates.

However, the company’s “core business” earnings, which exclude fluctuations in the value of financial derivatives the company uses to hedge against interest rate shifts, rose $19 million, or 1%, to $1.845 billion, while earnings per share increased to $1.86.

Gains in core earnings were driven by smaller losses due to the repurchase of debt and an increase in guaranty fee income, the company said.