Fannie Mae To Tighten Accounting

Mortgage giant Fannie Mae will adopt a tougher accounting standard demanded by its regulator in valuing securities backed by loans on manufactured homes, the company said yesterday in a regulatory filing.

The change involves accounting for some $8 billion in manufactured home loans -- essentially mortgages on mobile homes -- and $300 million in aircraft leases. Manufactured home loans have been beset by defaults recently and the regulator, the Office of Federal Housing Enterprise Oversight (OFHEO), wants such losses reported more quickly.

OFHEO last week ordered Fannie Mae to use the more stringent accounting method, and have the new method in place by this Friday.

This had raised the question of whether the company would have to restate past financial results -- an embarrassing occurrence and one that brought a firestorm on Freddie Mac, a smaller but similar federal housing finance company, when it had to do so last year for other reasons.

District-based Fannie Mae said in a filing with the Securities and Exchange Commission that it had conferred with the agency. And "taking into account guidance from the SEC," it had concluded that its past treatment of losses on manufactured housing and asset-backed securities was "consistent with" generally accepted accounting principles and that "no restatement of prior period financial statements is required."

The company said it would provide to OFHEO recalculated numbers from this year's first quarter and from 2003 to show what its results would have looked like if the new accounting standard had been used then.

Fannie Mae said it would use the new method in its SEC filings for the second quarter of this year, and it expects the change will result in a charge to shareholders' equity of between $240 million and $260 million in that quarter.

Shareholder equity in the first quarter was $20.8 billion, a decline of $1.5 billion, the filing said.

Fannie Mae and Freddie Mac are both government-sponsored enterprises, meaning that they operate under federal charters but are owned by private stockholders. They raise money by borrowing in the nation's capital markets to buy mortgages, providing lenders with more capital for housing.

They hold mortgages in their own portfolios and also package loans into securities, which they sell to other investors. Rivals and other critics have been urging regulators and Congress to rein in both companies, arguing that they have grown too big and too risky.

The SEC filing included Fannie Mae's first-quarter balance sheet, which it had held back when it announced its earnings for the period last month. Officials said at the time that the balance sheet contained "an extraordinary number of transactions that needed to be validated," and it was "the most prudent course to take the extra time" to get the numbers right.

OFHEO Director Armando Falcon Jr., in a letter to Fannie Mae Chairman Franklin D. Raines last week, directed the company to begin reporting "impairments" -- reductions in value -- in these assets more promptly.