A Sept. 21 Business article about a regulatory review of Fannie Mae incorrectly said the mortgage funding company had hired Stanley Sporkin, a former enforcement chief at the Securities and Exchange Commission. Sporkin was hired by Fannie Mae's regulator, the Office of Federal Housing Enterprise Oversight. (Published 9/22/04)
Fannie Mae's board of directors met yesterday to hear details about accounting problems its regulators have uncovered during a long-running review, according to a source familiar with the matter.
It was not clear if the problems were extensive enough to lead to a restatement of Fannie's past earnings, said a government official who had been briefed on the findings but spoke on condition of anonymity because the report had not been released to the public.
One area of concern involved possible "earnings management," the government source said. The term refers to making corporate financial results look stronger or steadier than they would otherwise appear, which can boost or protect a company's stock price. Some types of earnings management may comply with accounting rules, which are sometimes fuzzy or debatable; other types can cross the line into violations of securities laws.
Office of Federal Housing Enterprise Oversight regulators described "a number of circumstances that sounded troubling, and we need to know more," said an Securities and Exchange Commission official who was briefed on the findings last week.
"It does appear that smoothing has been a problem at Fannie Mae, . . . that there has been smoothing of earnings" in the company's financial reports, said Michael DiResto, spokesman for Rep. Richard H. Baker (R-La.).
Baker, a frequent critic of the company, chairs a House subcommittee that oversees Fannie Mae. Baker was briefed on OFHEO's finding over the weekend.
Spokesmen for Fannie Mae and OFHEO declined to comment on the review, which was reported yesterday in the Wall Street Journal. Several outside board members did not return calls, and one referred questions to the company.
The regulators hired the accounting firm Deloitte & Touche LLP in February to help scrutinize Fannie's accounting after revelations last year of elaborate manipulations at Freddie Mac, another private, government-chartered mortgage company. Freddie agreed to pay $125 million and replaced its top executive team.
In May, OFHEO disclosed partial results of its review, saying Fannie Mae had not fully accounted for losses on certain assets that had declined in value.
Matters that regulators are now questioning include Fannie's accounting for complex financial contracts known as derivatives (which the company uses to hedge against interest-rate movements), the costs of loan originations and possible use of "cookie jar" reserves several years ago, a government official said. Cookie jar reserves are funds that companies place in reserve in times of bounty to draw upon and bolster reported financial performance when earnings are weak.
In a congressional briefing, the agency said it found shortcomings in Fannie Mae's internal controls and "discrepancies" with generally accepted accounting principles, said a congressional source, who would not be quoted by name because it was not the source's place to speak for the regulators.
Fannie and Freddie were chartered by the government to create a steady flow of funds for home mortgages. The companies borrow money from investors to buy mortgages from lenders, thus replenishing lenders' funds. They also package mortgages as securities for sale to investors. Fannie guarantees the payments on about $1.9 trillion of mortgage-backed securities.
The scandal at Freddie Mac spurred efforts by the Bush administration and some members of Congress to create a new regulatory agency for Fannie and Freddie, but those efforts have stalled.
Fannie Mae recently hired Stanley Sporkin, former head of enforcement at the SEC, who declined to comment yesterday on the review.
Last year, as the problems at Freddie came to light, Fannie Mae Chairman Franklin D. Raines said Fannie had "not undertaken any transactions to distort our true financial condition."
Fannie Mae's stock closed yesterday at $75.98, down $1.23.
Staff writer Kathleen Day contributed to this report.