Report claims more Fannie Mae violations

September 29, 2005
By Annys Shin
The Washington Post

WASHINGTON — Shares of Fannie Mae fell nearly 11 percent yesterday after a news report that investigators looking into the mortgage company's finances have unearthed further accounting violations. The report by Dow Jones Newswire, citing anonymous sources "close to" or who "have been involved" in the investigation, said the company overvalued assets, underreported credit losses and misused tax credits.

Fannie Mae officials declined to comment, as did the company's chief regulator, the Office of Federal Housing Enterprise Oversight (OFHEO), which uncovered accounting violations at Fannie Mae last year. OFHEO, in a preliminary report of its findings, had said the company did not properly account for losses on derivatives, financial instruments Fannie relies on to protect the value of its assets from swings in interest rates.

In December, the Securities and Exchange Commission (SEC) ordered Fannie Mae to restate roughly $10.8 billion in previously reported earnings, leading to the ouster of Chief Executive Franklin Raines and Chief Financial Officer Timothy Howard.

The accounting scandal has prompted a move in Congress to more strictly regulate the mortgage-finance company, which buys mortgages from banks and other lenders and packages them into securities for sale to investors. OFHEO, which is still investigating Fannie's finances, is expected to issue its final report by March 31, an agency spokeswoman said.

The SEC and federal prosecutors also are investigating Fannie, in addition to an investigation ordered by the company's board and led by former Sen. Warren Rudman, R-N.H. Rudman has said he expects to release his findings by the end of the year.

Wall Street analysts found the Dow Jones report less alarming than did the markets. "As we've been saying for quite a while, we do think the accounting problems and operational problems are going to be significantly more dramatic than most have expected," said Josh Rosner of Medley Global Advisors in New York.

In a separate announcement, OFHEO said that as of June 30, Fannie had sufficient capital on hand to meet regulatory requirements and anticipated the company will come up with an additional $5.9 billion that OFHEO has mandated it put aside as a result of the accounting violations. Fannie Mae stock closed yesterday at $41.71, down $4.99.