Fannie Mae Spending Over $1B on Review

November 9, 2006

By Marcy Gordon
AP Business Writer

WASHINGTON - Fannie Mae said Wednesday it expects to spend more than $1 billion this year on the massive review of its accounting and preparing financial statements as the mortgage giant pushes to complete it by year's end.

The government-sponsored company, which finances one of every five home loans in the United States, is emerging from an accounting scandal that brought the ouster of top executives and a record $400 million civil fine in a settlement with federal regulators. Fannie Mae also said it would miss a regulatory deadline Wednesday for filing its financial report for the third quarter of 2006. The company hasn't filed an earnings statement since late 2004.

Federal regulators that year accused Fannie Mae of serious accounting problems and earnings manipulation to meet Wall Street targets, and the Securities and Exchange Commission ordered the company to restate earnings back to 2001.

Washington-based Fannie Mae is the second-largest U.S. financial institution after Citigroup Inc.

The anticipated restatement has been estimated at $10.8 billion, though Fannie Mae says it expects the final amount could be lower. The company said in August it believes that the accounting review has uncovered the last of the errors.

In its third-quarter filing Wednesday, Fannie Mae said it expects to spend about $850 million this year on the complex reworking of its accounting and related expenses - including legal fees for its defense against suits filed by shareholders - and more than $200 million on preparing financial statements for periods after 2004 to bring its reporting current.

The process "has required, and continues to require, a substantial amount of time and resources because the restatement entails significant complexities," the company said in its filing with the SEC.

Last May, the federal agency that regulates Fannie Mae and its smaller government-sponsored sibling, Freddie Mac, issued a blistering report alleging a six-year accounting fraud at Fannie Mae. Regulators said the scheme included manipulations to reach quarterly earnings targets so that company executives could pocket hundreds of millions in bonuses from 1998 to 2004.

The Justice Department had pursued a criminal investigation, but federal prosecutors said in August they had shut down their probe. The SEC still could bring civil actions against individual executives, including people no longer at Fannie Mae, with the burden of proof less stringent than in criminal prosecutions.

In May, the company disclosed new accounting problems that had been uncovered in its business of issuing securities backed by the billions of dollars of home mortgages annually that it buys from lenders and bundles together for resale to investors worldwide.

Similarly, Fannie Mae in March disclosed new accounting problems that had been uncovered in several areas, including loans, investment securities, houses acquired through foreclosures, interest on delinquent home loans, and reverse mortgages.

They all are in addition to the accounting-rule violations that came to light in September 2004 involving derivatives, the financial instruments that Fannie Mae and Freddie Mac use to hedge against swings in interest rates, and its mortgage commitments.

The two were created by Congress to pump money into the $8 trillion home-mortgage market to keep interest rates low and make home ownership affordable for low- and moderate-income people. Freddie Mac has been emerging from its own accounting scandal, which surfaced in mid-2003.

Fannie Mae shares rose $1.74, or 2.9 percent, to $41.64 in midday trading on the New York Stock Exchange.

Copyright 2006 Associated Press

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