Fannie Mae Completes Accounting Overhaul, Earnings Restatement

Fannie Mae completed a massive reworking of its accounting and will be disclosing a multibillion-dollar restatement of its earnings in the scandal that stunned financial markets and brought the ouster of top executives and a record fine against the government-sponsored mortgage giant.

The long-awaited correction of its profits from 2001-2004, as ordered by the Securities and Exchange Commission, is costing the company some $1 billion this year to carry out, Business Week reports.

Made public Wednesday, it is the first earnings statement filed by the government-backed mortgage company, which finances one of every five home loans in the U.S., since late 2004.

The scandal erupted in the fall of that year when regulators accused Fannie Mae — with its long-standing prestige, political clout and reputation for financial excellence — of serious accounting problems and earnings manipulation to meet Wall Street targets.

Last May, the federal agency that regulates Fannie Mae and Freddie Mac, its smaller sibling in the $8 trillion home mortgage loan market, issued a blistering report alleging a six-year accounting fraud at Fannie Mae, the second-largest U.S. financial institution after Citigroup Inc.

Regulators said the home mortgage loan scheme included manipulations to reach quarterly earnings targets so that company executives could pocket hundreds of millions in bonuses from 1998-2004.

Fannie Mae paid a record $400 million civil fine in a settlement with the Office of Federal Housing Enterprise Oversight (OFHEO) and the SEC.

While the 2001-2004 restatement marks a significant step, “They still have a way to go” to make Fannie Mae’s financial reports current to the present time, said Armando Falcon, who was the director of OFHEO for six years until mid-2005. “If Freddie Mac is any indication, those two years won’t be easy… There’s a lot of work to go.”

Freddie Mac, which also is government-sponsored and has its stock publicly traded, had its own accounting scandal that came to light in June 2003. The company misstated earnings by some $5 billion – mostly underreported — for 2000-2002 to smooth out volatility in profits and uphold its image on Wall Street as a steady performer.

Over the last two years, Fannie has disclosed a passel of new accounting problems that had been uncovered in several areas:

• In its core business of issuing securities backed by the billions of home mortgage funds annually that it buys from lenders and bundles together for resale to investors worldwide.
• In loans, houses acquired through foreclosures, interest on delinquent home loans, and reverse mortgage transactions.

They all were on top of the accounting 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.

Fannie Mae CEO Franklin Raines, a prominent Washington figure who was White House budget director in the Clinton administration, was kicked out in December 2004 along with then-CFO Timothy Howard.

Fannie Mae and Freddie Mac were created by Congress to pump money into the market to keep mortgage rates low and make home ownership affordable for low- and moderate-income people.