Accounting for Fannie Mae Errors

Fannie Mae has already said it made significant errors in how it applied accounting rules for derivatives, how it classified certain investments, and how it booked expenses and fees, that will cut its reported results from 2001 to 2003 by an estimated $10.8 billion. Yesterday, it acknowledged several new accounting problems:

Insurance

Fannie said yesterday that one mortgage insurance policy it purchased wasn't an insurance policy after all because it did not transfer a sufficient amount of risk to the insurer. These so-called finite-risk insurance policies are under intense scrutiny by the Securities and Exchange Commission because some companies have allegedly used them to smooth earnings. In Fannie's case, a $35 million "premium" it paid for the policy was misclassified as an expense. Instead, the $35 million will be classified as a deposit, to be drawn on to cover losses from defaults in the mortgage portfolio it sought to insure. Fannie didn't identify the insurer, but said it is reviewing all of its insurance arrangements for similar errors.

Synthetic Fuel Investments

As a tax-saving strategy, many companies have invested in partnerships that own money-losing equipment for creating synthetic fuel. Fannie is among them. The company said yesterday that it made errors in accounting for its synthetic fuel partnerships.

Low Income Housing Tax Credit Investments

Many companies, including Fannie Mae, take advantage of a provision of the tax code that allows them to receive tax credits if they invest in low-income housing development. The company disclosed yesterday that it made a variety of errors in how it accounted for investments in partnerships to build low-income housing, including booking expenses that should have been capitalized as assets and not reflecting the fully committed amount of the investment on its balance sheet.