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Restatement of earnings seen as possibility for Fannie Mae

By MARCY GORDON
The Associated Press

Seattle native Franklin Raines heads Fannie Mae.

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WASHINGTON — A day after Fannie Mae agreed to regulators' demands to boost its capital cushion against risk and revamp its accounting, officials said yesterday that the possibility of the beleaguered mortgage giant having to restate its earnings had been raised in the negotiations.

With investigations by the Office of Federal Housing Enterprise Oversight and the Securities and Exchange Commission (SEC) still under way, it isn't known whether the massive recalculations ordered for Fannie Mae by the housing-oversight office will force the company to correct its past earnings.

In discussions with Fannie Mae directors that began last week, the oversight regulators "told the Fannie Mae board it is one of the issues the board will have to consider in the process of correcting its accounting," spokeswoman Corinne Russell said. Janice Daue, a spokeswoman for Fannie Mae, confirmed that the issue of a possible restatement had been discussed.

The role of Fannie Mae's management in the accounting debacle and its accountability also remain under examination by the housing-oversight regulators — who recently accused company executives of failing to fully cooperate with their investigation.

The regulators' report of the inquiry cited an instance in 1998 in which accounting for $200 million in expenses was put off to a future reporting period so executives, including Chairman and Chief Executive Franklin Raines, could receive full bonuses. Raines, a Seattle native and graduate of Franklin High School, has headed Fannie Mae since January 1999.

On Capitol Hill, an aide said that Roger Barnes, the former Fannie Mae accountant who raised questions about the company's calculations to his supervisors last year, has agreed to testify at a hearing by a House panel next Wednesday. According to the housing-oversight report, Fannie Mae management failed to adequately investigate Barnes' concerns.

Barnes left the company last November. The regulators said his cooperation was important to their investigation of Fannie Mae.

It is the SEC, which is the final arbiter regarding accounting rules, that will determine whether a restatement is called for. In their discussions with the SEC, the housing-oversight regulators could express an opinion on the subject.

A former SEC official said an earnings statement is a distinct possibility.
 
"I think there'll be a chance of better than 50-50 it will give rise to a restatement, especially given some of the language in the agreement yesterday," said Lynn Turner, former accounting chief at the SEC, during an investor conference call sponsored by Prudential Securities.

Or Fannie Mae's board could decide that an earnings correction is needed, as was the case last year with Freddie Mac.

Fannie Mae agreed to make the sweeping changes in its finances, accounting and internal controls under pressure from the housing-oversight regulators, who last week accused it of pervasive earnings manipulation to meet Wall Street expectations. The accord was announced Monday after a week of negotiations.

Some experts say that the mandate for Fannie Mae to increase its reserve capital by approximately $5 billion by mid-2005 could crimp profits, slow growth or force the sale of assets for the biggest financer and guarantor of home mortgages in the country.

Fannie Mae and 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 — Fannie Mae's is nearly $1 trillion — are widely held by investors in the United States and around the globe.

An accounting crisis that erupted in June 2003 at Freddie Mac, with the restatement of earnings, the ouster of top executives and investigations by the SEC and the Justice Department, prompted the Office of Federal Housing Enterprise Oversight to examine Fannie Mae's accounting. Freddie Mac eventually was fined a record $125 million in a settlement with housing-oversight regulators.

Material from Reuters is used in this report.

Finance chief sells

$7.3 million of stock

Fannie Mae Chief Financial Officer J. Timothy Howard has sold $7.3 million of the mortgage buyer's stock since a regulatory investigation of its accounting practices became public in July 2003.

Howard, 56, sold $1.7 million of shares in November 2003 and has sold $5.6 million since February, according to the Washington Service, a company that tracks insider buying and selling. Howard's sales this year were made as part of a program he set up to divest shares at preset intervals.

The Wall Street Journal earlier reported Howard's sales.

Howard surrendered $1 million worth of shares to Fannie Mae in January to pay for taxes on restricted stock he had received, the Washington Service said.

He obtained the stock with options that were about to expire, according to SEC documents. The options entitled him to purchase Fannie Mae stock at $18.62 a share, the documents said.

Fannie Mae shares rose 46 cents yesterday to $66.96.

Reuters