Fannie Mae Accounting Probe Could Shake Up Management

Federal regulators have raised the possibility of removing the management of mortgage giant Fannie Mae after finding accounting problems they described Thursday as more serious than those that brought the ouster of top executives at rival Freddie Mac.

The findings by the Office of Federal Housing Enterprise Oversight warrant “immediate remedial action,” the agency’s director wrote to Fannie Mae’s directors in a letter released Thursday.

In addition, “we must consider the accountability of management and whether we have sufficient confidence in management to fully implement these corrective measures and bring about broad cultural and operational changes,” Armando Falcon wrote in the letter dated Monday. “The analysis and findings of this report make it difficult to assert such confidence.”

The Securities and Exchange Commission also is investigating the accounting of government-sponsored Fannie Mae, the second-largest U.S. financial institution, behind Citigroup Inc.

The regulators’ report, made public Wednesday after an eight-month investigation, found pervasive accounting problems that the agency said cast doubt on the company’s past earnings reports and even its financial soundness.

Management at Fannie Mae “deliberately developed and adopted” inappropriate accounting policies, supported widespread violations of generally accepted accounting principles, tolerated lax internal controls and failed to properly investigate an employee’s concerns about accounting, the report said.

The 210-page report also cited the possibility of deliberate accounting maneuvers designed to bring bigger bonuses to executives.

The investigation continues, and the regulators haven’t yet quantified the result of the faulty accounting they said was widespread at the company. Agency officials said Thursday that they didn’t know whether Fannie Mae would have to restate its earnings for any period from 2001 to 2003, or whether its earnings overall might have been overstated or understated.

Freddie Mac, Fannie Mae’s smaller competitor in the multi-trillion-dollar home mortgage market, disclosed in June 2003 that it had understated profit by about $4.5 billion for 2000 to 2002 in an effort to smooth earnings.

Half a dozen officials at the Office of Federal Housing Enterprise Oversight, including some senior executives, also indicated that the problems they had found at Fannie Mae were more serious, far more complex and wider in scope than those at Freddie Mac -- which was fined a record $125 million in a settlement. The officials spoke to a group of reporters on condition they not be named.

Fannie Mae spokeswoman Janice Daue declined to comment Thursday.