Report: Fannie Mae Manipulated Accounting

In this June 16, 2005, file photo, a house, still under construction, is marked as sold in the west hills of Portland, Ore. (AP Photo/Don Ryan) (Don Ryan - AP)

WASHINGTON -- Federal regulators issued a blistering report about mortgage giant Fannie Mae on Tuesday, alleging accounting manipulation aimed at lining executives' pockets and lying to investors about smooth growth in profits and earnings. The government-sponsored mortgage company was fined $400 million and agreed to limit its growth.

The long-awaited report by the Office of Federal Housing Enterprise Oversight came as Fannie Mae, which has not filed an earnings statement since late 2004, corrects its accounting and struggles to emerge from an $11 billion scandal. The product of an extensive three-year investigation, the housing oversight agency's report is tougher in its criticism than an assessment ordered by Fannie Mae's board that was released in February.

The OFHEO review, involving nearly 8 million pages of documents, details what the agency describes as an arrogant and unethical corporate culture, calling Fannie Mae's image of company prestige and excellence a sham. It said Fannie Mae employees manipulated accounting so that senior executives could collect millions in bonuses from 1998 to 2004.

OFHEO and the Securities and Exchange Commission announced a $400 million civil penalty against Fannie Mae, the largest U.S. buyer and guarantor of home mortgages, in a settlement over the alleged accounting manipulation. Of that amount, the $350 million assessed by the SEC _ one of its biggest penalties ever in an accounting fraud case _ will go to compensate Fannie Mae investors damaged by the alleged violations.

The company also agreed to limit the growth of its multibillion-dollar mortgage holdings, capping them at $727 billion, and to make top-to-bottom changes in its corporate culture, accounting procedures and ways of managing risk.

Twenty-nine current and former executives and employees _ including former chairman and chief executive Franklin Raines and former chief financial officer Timothy Howard _ will be reviewed for possible disciplinary action or termination.

Daniel Mudd, the company's president and CEO, will lead the review. His conduct already has been examined by the board and found to present no problems, company officials said.

"It is very important that we look at Dan through the leadership that he has given this company over the last 18 months," Fannie Mae Chairman Stephen Ashley said during a conference call Tuesday with analysts. The review of Mudd "gives us no reason to express anything other than complete confidence in Dan Mudd's leadership of this company," he said.

Washington-based Fannie Mae neither admitted nor denied wrongdoing under the settlement but did agree to refrain from future violations of securities laws.

The report details a series of events in the fall of 2003 involving Mudd, who was then the chief operating officer, in which an employee named Michelle Skinner expressed serious concerns in an e-mail to him about the company's accounting. The issues were similar to those raised by then-Fannie Mae accountant Roger Barnes to other company officials about a month earlier. Mudd did not deal appropriately with Skinner's concerns and "missed an opportunity" to recognize potential problems, the report says.

That was a year before the OFHEO regulators brought to light Fannie Mae's accounting-rule violations and alleged earnings manipulation to meet Wall Street targets _ disclosures that stunned the financial markets. In December 2004, the SEC ordered the company to restate its earnings back to 2001 _ a correction expected to reach an estimated $11 billion. The Justice Department has been pursuing a criminal investigation.

Raines and Howard were swept out of office by Fannie Mae's board in December 2004.