Federal Review of Fannie Mae Finds Fresh Accounting Woes

U.S. regulators Wednesday outlined a fresh series of accounting missteps at mortgage finance giant Fannie Mae and said straightening out the company’s books would take years.

The new concerns, based on a special examination of Fannie Mae’s books, reflect a “tendency toward overly aggressive interpretation” of accounting rules, and in some instances, “willful disregard” of standards by Fannie Mae, said Armando Falcon, director of the Office of Federal Housing Enterprise Oversight.

The regulator has oversight over Fannie Mae and Freddie Mac, its sibling government-sponsored mortgage financing provider.

Falcon testified before a House Financial Services Committee panel at the same time that Federal Reserve Chairman Alan Greenspan told a Senate panel that Congress needed to place restrictions on the rapid growth of Fannie Mae and Freddie Mac.

Even so, investors concluded that Congress was a long way from passing legislation curbing Fannie Mae’s activities. The company’s stock rose $1.87 to $54.15 on the New York Stock Exchange.

Falcon told lawmakers it could take years for the company to be current in its financial reporting.

“The model might be to look at the Freddie Mac situation. There it did take a couple of years for the company to produce financial statements and it will take it a couple of years beyond that to get timely,” Falcon said.

Freddie Mac announced an earnings restatement in early 2003 and did not make financial reports until June 2004.

Congress has begun to consider tightening oversight of Fannie Mae and Freddie Mac following accounting problems that have led or are likely to lead to multibillion-dollar earnings restatements.

Fannie Mae replaced its chief executive, Franklin Raines, and chief financial officer, Timothy Howard, last year after securities regulators backed Falcon’s finding of widespread accounting problems.

Among the newly discovered problems at Fannie Mae, Falcon said, was an improper accounting of pooled mortgage loans as held for investment instead of held for sale because of a faulty process in place since 1983.

Also, Fannie Mae appears to have sorted through loans and retained the highest-quality ones for its own portfolio, in violation of accounting standards, the Office of Federal Housing Enterprise Oversight said.

“This practice appears to stand in stark contrast to the company’s denials of engaging in ‘cherry picking’ when the matter was reviewed by a 2003 task force,” Falcon said.

Falcon said Fannie Mae also violated an accounting principle in the way it used “qualified special purpose entities” to issue some mortgage-backed securities.