Additional serious accounting problems at Fannie Mae recently discovered by federal regulators could mean as much as $2.8 billion in further losses, according to an analysis based on information provided by the embattled mortgage giant.
Fannie Mae shares, which have been battered in the weeks since its accounting crisis came to light last September, lost nearly 2 percent on the latest disclosure which was reported Thursday in The Wall Street Journal.
An investigation by the Office of Federal Housing Enterprise Oversight, which supervises Fannie Mae, last year found serious accounting problems at the biggest U.S. buyer of home mortgages as well as a pervasive pattern of earnings manipulation and lax interrnal controls.
The Securities and Exchange Commission ordered Fannie Mae in December to restate its earnings back to 2001, a correction estimated at $9 billion. The company’s chief executive and chief financial officer were forced out by the board of directors.
Last month, OFHEO informed Fannie Mae’s board of additional problems including accounting for securities and loans, and practices to spread the impact of income and expenses over time. The agency identified internal control deficiencies at the government-sponsored company, which is the second-largest U.S. financial institution behind Citigroup Inc., “that it believes raise safety and soundness concerns,” Fannie Mae disclosed.
Possible restatement
The anticipated restatement of some $9 billion in earnings could climb to nearly $12 billion if the company has to recognize the full $2.8 billion in additional estimated losses, the Journal reported in Thursday’s editions.
OFHEO spokeswoman Corinne Russell declined comment, saying the agency would not discuss matters related to a possible restatement of earnings. Fannie Mae spokesman Brian Faith and SEC spokesman Matt Well also declined comment.
The newspaper cited a disclosure in Fannie Mae’s report for last year’s second quarter showing $2.76 billion in losses on a type of derivatives, financial instruments it uses to hedge against interest-rate swings. The derivatives in question are called mortgage commitments, undertakings by the company to buy mortgage loans and mortgages bundled into securities from banks and other lenders. Losses on such commitments can occur when interest rates rise after the company has agreed to buy the loans at a previously agreed rate.
Stephen Ryan, an accounting professor and derivatives specialist at New York University who analyzed the Fannie Mae financial reports, told The Journal that some or all of the $2.76 billion in losses may have to be counted against the company’s second-quarter earnings and the reserve capital it is required to hold as security against risk.
OFHEO last month gave Washington-based Fannie Mae a three-month extension for boosting the capital cushion by $5 billion. The company has been reducing its portfolio of mortgage loans even faster than expected as it prepared to meet the regulators’ original June deadline.
In recent weeks the company also has raised fresh capital by issuing some $5 billion in preferred stock and slashed its first-quarter dividend payout by half, to 26 cents a share, to make up its anticipated shortfall.
To cut costs, Fannie Mae recently stopped awarding stock options to senior managers.
Fannie Mae and Freddie Mac, its smaller rival in the $8 trillion home-mortgage market, have wielded influence in Congress and traditionally have been heavy contributors to lawmakers of both parties. The accounting crisis at Fannie Mae, and Freddie Mac’s disclosure in June 2003 that it had understated profits by some $4.5 billion for 2000-2002 in an effort to smooth earnings, have bolstered calls by lawmakers and government officials for tighter regulation of the two and curtailment of their privileges.
Fannie Mae and Freddie Mac were created by Congress to pump money into the home-mortgage market. They buy and guarantee repayment of billions of dollars of home loans each year from banks and other lenders, then bundle them into securities that are resold to investors worldwide.
