SEC investigates Fannie Mae
|September 24, 2004|
Mortgage giant may have manipulated earnings
By Samantha Peterson
Fannie Mae CEO Franklin Raines The Securities and Exchange Commission has launched an informal inquiry into Fannie Mae after a federal report suggested the mortgage giant may have manipulated earnings and used improper accounting techniques.
Fannie's federal regulator, the Office of Federal Housing Enterprise Oversight, publicly released a 211-page report late Wednesday that outlines misapplications of Generally Accepted Accounting Principles, or GAAP for short. Those missteps are not limited occurrences, "but are pervasive and are reinforced by management," according to the report.
The report, presented to Fannie Mae's board of directors earlier this week, found that the company had used improper "cookie jar" reserve accounting – setting aside large cash reserves to reduce revenues in some years so they can be used in other years when the company needs them. That smoothes out a company's earnings, but can give investors an inaccurate view of a company's financial performance.
The housing office found other accounting problems, including at least one instance where the company deferred expenses to meet executive bonus targets. The problems differ in their specifics, but all "have emerged from a culture and environment that made these problems possible."
"The matters detailed in this report are serious and raise concerns regarding the validity of previously reported financial results, the adequacy of regulatory capital, the quality of management supervision, and the overall safety and soundness of the enterprise," the report states.
Ann Korologos, presiding director of Fannie Mae's board of directors, in a statement said, "The board takes the report seriously and is working with OFHEO to resolve these matters." The board has pledged its full cooperation with the regulators, she said.
Fannie's chairman and CEO Franklin Raines said the company's management team supports the board of directors and "will assist them in any way we can as they carry out their duties."
Fannie is a shareholder-owned company chartered by Congress to ensure a constant flow of mortgage funds. OFHEO's ongoing investigation initially stemmed from the accounting scandal at Fannie's corporate cousin, Freddie Mac, which understated profits by about $5 billion for 2000-2002 to smooth earnings and meet Wall Street expectations. Freddie Mac paid a $125 million fine and ousted several top executives.
The two corporations securitize and either resell or own a substantial portion of the outstanding home mortgage debt in the United States. The secondary market helps increase the liquidity of mortgage funds, which makes home loans more easily available to borrowers.
According to OFHEO's report, characteristics of Fannie's culture that gave rise to the problems include:
Copyright 2004 Inman News