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SEC Takes Fannie Mae Investigation To Next Level

Mortgage Giant Will Delay Financial Report

By David S. Hilzenrath and Carrie Johnson
Washington Post Staff Writers
Friday, October 15, 2004; Page E01

The Securities and Exchange Commission inquiry into accounting practices at Fannie Mae has escalated into a formal investigation, after commissioners voted to give the agency staff the power to subpoena documents and testimony from witnesses, according to sources briefed on the case.

The District-based mortgage giant announced separately yesterday that it will delay the announcement of its third-quarter financial results.

Timeline: Fannie Mae (washingtonpost.com, Oct 8, 2004)
Both Sides Critical At Fannie Hearing (The Washington Post, Oct 7, 2004)
On Fannie's Board, Many Bonds (The Washington Post, Oct 6, 2004)
Fannie Executives to Defend Accounting Practices (The Washington Post, Oct 6, 2004)
Restatement Decision Deferred (The Washington Post, Sep 30, 2004)
As Fannie, Freddie Regroup, Impact May Be Minimal (The Washington Post, Sep 29, 2004)
Regulator Says Fannie Resisted (The Washington Post, Sep 25, 2004)
Regulator Has No Confidence in Fannie Leadership (The Washington Post, Sep 24, 2004)
Fannie Employee Raised Concerns (The Washington Post, Sep 24, 2004)
Report Slams Fannie Mae (The Washington Post, Sep 23, 2004)
Warnings Shadowed Firms' Rapid Growth (The Washington Post, Sep 23, 2004)
Probe Examining Fannie's Promises (The Washington Post, Sep 23, 2004)
_____Related Coverage_____
Futures of Fannie's CEO, CFO Unclear As Directors Meet (The Washington Post, Dec 17, 2004)
Banks Scrutinize Their Accounting (The Washington Post, Dec 17, 2004)
Fannie Took the Shortcut (The Washington Post, Dec 16, 2004)
SEC Tells Fannie Mae To Restate Earnings (The Washington Post, Dec 16, 2004)

The SEC move comes just days after Fannie, which has come under fire from lawmakers and other regulators, was instructed by federal prosecutors in Washington to preserve documents that relate to an ongoing criminal investigation.

The SEC's enforcement division has been examining Fannie Mae since early this year, after accounting problems were uncovered at rival mortgage financier Freddie Mac. Sources spoke on the condition of anonymity because of the sensitive nature of the investigation and the secrecy surrounding enforcement issues.

The SEC action marks a natural evolution from one preliminary stage of the agency's investigation to the next. It does not necessarily mean that the commission will find wrongdoing at Fannie Mae but gives investigators more authority to seek evidence, legal experts said.

"We have no comment at all," said Janis Smith, a Fannie Mae spokeswoman, of the SEC move.

The announcement of the delayed financial statement comes as the company grapples with allegations by its regulator, the Office of Federal Housing Enterprise Oversight, that it manipulated its earnings, in part to boost bonuses for top executives.

The company typically issues a news release announcing its quarterly results weeks before it files a more extensive quarterly report with the SEC. However, for the quarter ended Sept. 30, Fannie will announce the results when it submits the SEC filing, Fannie Mae Senior Vice President Jayne Shontell said in a statement.

That filing is due Nov. 15, and Fannie Mae "will actively seek to file within this time frame," Shontell said, apparently leaving open the possibility that it could miss the deadline.

"We think this is the right course of action . . . the prudent course of action," said spokesman Charles Greener. He declined to elaborate as to the reasons.

Fannie's rival, Freddie Mac, which last year admitted to billions of dollars of accounting errors and distortions, is still upgrading its accounting systems and has yet to resume the timely reporting of its quarterly results.

In another development, the Department of Housing and Urban Development announced yesterday that Fannie Mae and Freddie Mac met federal quotas last year requiring them to aid low- and moderate-income families. In reviewing Freddie Mac's past performance, however, HUD found that the McLean-based company counted some of the same loans in 2001 and 2002.

After eliminating the double-counting, Freddie fell short of the goal in 2002, HUD said. But the margin was so slight the department imposed no penalty.

Freddie Mac spokeswoman Sharon McHale said the company believed it had "a very good faith basis" for counting some of the same loans toward the housing goals in 2001 and 2002, but McHale said the company accepted HUD's decision that those loans should not count toward the 2002 target.

Fannie and Freddie, because of their government sponsorship, can borrow at preferential rates to buy loans. They also package mortgages into securities for sale to investors. Congress set the affordable housing mandate in the early 1990s to get the companies to use their advantage in the marketplace to help underserved communities.

The companies met their 2003 housing goals with help from some unusual transactions whose validity HUD had questioned. Yesterday, Assistant Secretary for Housing John C. Weicher said HUD concluded that the transactions legally qualified for credit toward reaching the affordable housing goals. But he added that he didn't think those deals were what policymakers had in mind when they established the standards.

The deals that HUD had questioned and then approved involved purchases by Fannie and Freddie of loans from Washington Mutual Inc. and Citibank in which the sellers retained the right to reverse the sales. When the law was drafted, "nobody was talking in terms of this kind of activity," Weicher said in a conference call with reporters.

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