Fannie Mae Warns of Possible $9B Loss

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By MARCY GORDON, AP Business Writer

Shares of Fannie Mae fell sharply in pre-market trading Tuesday as the mortgage giant's outside auditor KPMG refused to sign off on its third-quarter earnings report, causing the the company to miss a regulatory deadline for filing it.

The company's stock fell $2.50, or 3.6 percent, to $67.70 in electronic trading prior to the start of the session on the New York Stock Exchange.

Fannie Mae, whose accounting is under investigation by the Securities and Exchange Commission, also said Monday that if the agency finds that it has improperly accounted for derivatives ÔÇö the financial instruments it uses to hedge against interest-rate swings ÔÇö it would show an estimated net loss of $9 billion for the July-September period. And it acknowledged that some of its accounting policies do not comply with generally accepted accounting principles.

Washington-based Fannie Mae, which finances one of every five home loans in the United States, disclosed the SEC investigation on Sept. 22, stunning investors.

The company, recently cited by regulators in the Office of Federal Housing Enterprise Oversight for serious accounting problems and accused of earnings manipulation, notified the SEC Monday that it would not file the third-quarter report on time.

The OFHEO regulators had ordered Fannie Mae to make massive recalculations, and the delay fueled speculation as to whether the company would restate earnings.

SEC spokesman Matt Well declined comment on the filing as did Corinne Russell, a spokeswoman for OFHEO, an independent agency within the Department of Housing and Urban Development. Spokesmen for Big Four accounting firm KPMG could not be reached for comment Monday.

In its filing notifying the SEC, Fannie Mae said it "is not able to file a timely (quarterly report) that complies with the SEC's rules because it has been advised by its independent auditor that it is unable to complete its review of Fannie Mae's interim unaudited financial statements for the quarter ended September 30, 2004."

Fannie Mae also acknowledged that some of its accounting policies do not comply with generally accepted accounting principles, apparently contradicting recent public statements by top executives who have defended the company's accounting.

Chief executive Franklin Raines and Chief Financial Officer Timothy Howard insisted in sworn testimony at a congressional hearing last month that the HUD regulators' allegations of accounting improprieties and management misdeeds going back to the late 1990s were a matter of interpreting complex rules.

In its filing Monday, the company said it "recently determined that its methodology for performing" some calculations for 2001 and 2002 balance sheets "was not consistent" with generally accepted accounting principles. It said it expects the effect of the discrepancies will be an increase in earnings for 2001 and 2002, and a decrease in 2003 profits, "with the cumulative effect of these changes across the three periods netting to zero."

The "catch-up" calculations in question were related to 1998 expenses that OFHEO had said the company incorrectly put off to future periods so that top executives could collect full annual bonuses.

The stakes are high for Fannie Mae, the second-largest financial institution in the country behind Citigroup, which also faces a criminal investigation by the Justice Department.

The SEC inquiry makes things potentially tricky for Fannie Mae. Also by law, the quarterly financial reports must be certified in writing by Raines and Howard.

If the SEC investigators turn up accounting violations in the quarter, that could expose Fannie Mae and its executives to legal liability with shareholders and others, some analysts say.

A restatement could lead Fannie Mae's board to shuffle the company's executive ranks.

Fannie Mae and its smaller sibling Freddie Mac pump money into the home mortgage market by buying and guaranteeing repayment of billions of dollars of home loans each year from banks and other lenders, then bundling them into securities that are resold to investors. Their stock and debt are widely held by investors worldwide.

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Fannie Mae Top Executives May Be Ousted

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By MARCY GORDON, AP Business Writer

WASHINGTON - A review by the Securities and Exchange Commission has found that Fannie Mae violated accounting rules, amplifying the prospect of an earnings restatement and a possible ouster of top executives at the embattled mortgage giant.

Fannie Mae shares fell $1.54, or 2 percent, to $69.15 in trading midday trading Thursday on the New York Stock Exchange.

SEC Chief Accountant Donald Nicolaisen disclosed the findings of the agency's review late Wednesday and said he had told the government-sponsored company to restate its earnings.

Nicolaisen, in a statement, said Fannie Mae's accounting for 2001 through mid-2004 "did not comply in material respects" with accounting rules for derivatives, financial instruments used to hedge against interest-rate swings, and for some transactions related to loans.

Fannie Mae, the biggest financer of home mortgages in the country, said last month that if the SEC found that it had improperly accounted for derivatives, it would show an estimated net loss of $9 billion.

A restatement could involve at least that much in overreported earnings, depending on the movement of interest rates, analysts said Thursday.

In light of developments, "I do think it's highly likely that both Tim Howard and Frank Raines", the company's chief financial officer and chairman, respectively, will be forced to leave their positions, said Edwin Groshans of investment banking firm Fox-Pitt, Kelton. Otherwise, he said, "They're just going to be a lightning rod."

Raines and Howard defended the company's accounting in sworn testimony at a congressional hearing in October and rejected allegations by the Office of Federal Housing Enterprise Oversight of accounting improprieties and management misdeeds going back to the late 1990s.

Raines said at the hearing that if the SEC found accounting violations, he would be held accountable by the company's board and shareholders and would himself take responsibility.

The SEC and the Justice Department, in a separate criminal probe, have been investigating the accounting of Washington-based Fannie Mae, the second-largest financial institution in the country behind Citigroup.

Warren Rudman, the attorney and former senator who is acting as independent counsel to a special committee of Fannie Mae's board, declined to comment Thursday on possible next moves.

"We continue with our internal investigation," he said by telephone, describing the inquiry as "intensive and very broad-based."

Fannie Mae spokesman Chuck Greener, in a statement issued Wednesday night, said "We appreciate the comprehensive and expeditious review of these accounting issues."

"We will take the steps necessary to comply fully with the SEC's determination," he said. "Fannie Mae is committed to operating in a safe and sound manner."

Nicolaisen said the SEC took the unusual step of making public the findings of the staff review before the SEC had completed its investigation because Fannie Mae had asked the agency for its opinion.

"I have advised Fannie Mae that ... to provide investors with appropriate information, Fannie Mae should restate its financial statements," Nicolaisen said.

In September, the OFHEO regulators cited Fannie Mae for serious accounting problems and accused the company of earnings manipulation. The regulators had ordered Fannie Mae to complete massive recalculations, and the delay fueled speculation as to whether the company would restate earnings.

Fannie Mae last month missed an SEC deadline for filing its third-quarter financial results after its independent auditor KPMG refused to sign off on the report. The company also acknowledged that some of its accounting practices don't comply with generally accepted accounting principles.

Rep. Michael Oxley (news, bio, voting record), R-Ohio, chairman of the House Financial Services Committee and a longtime critic of Fannie Mae, said Wednesday that the SEC findings reaffirm the conclusions of the OFHEO regulators "and underscore the need for Congress to closely examine these issues."

"I am deeply disturbed that investors, the markets and Congress were misled by deceptive practices at Fannie Mae," Oxley said.

Fannie Mae and its smaller sibling Freddie Mac pump money into the home mortgage market by buying and guaranteeing repayment of billions of dollars of home loans each year from banks and other lenders, then bundling them into securities that are resold to investors. Their stock and debt are held by investors around the world.

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