Fannie To Meet Year-End Deadline

By Terence O'Hara
Washington Post Staff Writer
Thursday, August 10, 2006

Fannie Mae yesterday said it had identified all of its accounting errors and is on track to report its long-delayed 2004 results by the end of the year. The District-based mortgage finance company also said the impact of the errors on its earnings would be less than its previous $10.8 billion estimate.

Fannie Mae has not filed a quarterly earnings report for two years. In September 2004, regulators accused it of massive violations of accounting rules. That set off an exhaustive and expensive re-audit of three years of its financial operations that produced steady revelations of new accounting errors. The audit was accompanied by more than a year of executive turnover, investigations and a $400 million government fine in May.

The company yesterday indicated in a filing with the Securities and Exchange Commission that an end to its bookkeeping troubles is in sight. It said it should complete the restatement of results for the years 2002 and 2003 and publicly release final results for those years and 2004 by the end of the year.

"We've reached a significant milestone," chief executive Daniel H. Mudd said in a conference call with investment analysts. "We continue to move more and more items from the inbox to the outbox."

Fannie, chartered by Congress to provide a ready source of cash for home mortgages, finances about 20 percent of the U.S. home-mortgage industry.

In the filing, Fannie said it had identified what it considers the final mistake: a financially small error in how it accounted for administering trusts that contain mortgage investments. Fannie's previous estimate of $10.8 billion in reduced earnings from 2001 to 2004 included $2.4 billion in losses from certain mortgage investments. After running the investments through the proper accounting rule, the company recognized gains that were thought to be losses. The result will be to "significantly reduce" the $2.4 billion in losses, according to the securities filing . The company, however, won't quantify the gains until its auditors formally complete their analysis.

Earlier this year Fannie agreed to halt the growth of its own portfolio of mortgage assets, a $730 billion pile of investments that generate most of its profits. Fannie said yesterday that it might submit a business plan next year that would ask for "modest growth" in its portfolio.

Fannie estimated that it will spend $800 million this year on its restatement, litigation and regulatory troubles, including the $400 million settlement with its primary regulator, the Office of Federal Housing Enterprise Oversight, and with the SEC.

The Justice Department is investigating whether executives manipulated the accounting to show a steady rise in profit and to boost executive bonuses.

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