By Annys Shin
Washington Post Staff Writer
Thursday, May 12, 2005
Mortgage financing giant Fannie Mae said yesterday that its share of the mortgage-related securities market dropped from 45 percent in 2003 to 29 percent in 2004 because of the growing popularity of adjustable-rate mortgages, according to a filing with the Securities and Exchange Commission.
The company also said it is changing the way it accounts for certain investment securities at the prompting of its chief regulator, the Office of Federal Housing Enterprise Oversight. The change will not hurt the company's earnings, but it could decrease shareholder equity because some investments it said it had planned to hold for the long term will have to be recategorized as "available for sale" and be subject to short-term fluctuations in market price.
Janis Smith, a Fannie spokeswoman, said the company will not know how much the impact will be until an ongoing review of Fannie's accounting and finances is complete. The company yesterday said it would have to delay filing its first-quarter earnings statement while it completes that broader review of its financial situation.
Fannie Mae, a government-chartered, shareholder-owned company, was created by Congress to increase the availability of home loans by buying mortgages from banks, thereby freeing up money for more loans. Fannie holds mortgages in its investment portfolio or repackages them as mortgage-backed securities, which it sells to investors.
Last fall, OFHEO uncovered accounting irregularities that may force the company to restate as much as $12 billion in profit it had claimed in prior years. The accounting practices allowed the company to meet earnings targets that, in turn, triggered bonuses for senior executives.
The SEC agreed with OFHEO, prompting the resignation of top officials, and ordered the company to restate past earnings.
Congress is considering creating a new regulator for Fannie, and its smaller rival Freddie Mac, with the power to limit the size of the companies' investment portfolios. Critics say holding so many mortgages benefits the company's shareholders and not home buyers.
To a point, housing finance experts agreed with Fannie that its drop in market share was attributable to the proliferation of adjustable-rate mortgages. They noted that Fannie typically does not buy adjustable-rate loans from retail mortgage lenders because the lenders generally do not want to sell them.
But the experts added that the regulatory pressure on Fannie Mae is also helping constrict its business as it cuts back some of its investing activities to preserve capital. OFHEO has ordered Fannie to raise the amount of capital it has in reserve as a percentage of its holdings, a goal the company is pursuing by conserving cash and reducing its portfolio.
"The banks are far more willing to hold adjustable-rate mortgages than 30-year fixed. With the consumer preference for adjustable rates, it's harder for [Fannie] to get the volumes. Couple that with the spreads and the political and regulatory problems surrounding portfolio growth, and it's hard for them to be growing market share," said Josh Rosner, an analyst with Medley Global Advisors LLC in New York.
The company reported that its gross mortgage portfolio totaled $864.6 billion as of March 31, compared with $880.9 billion on March 31, 2004.