Fannie Mae's federal regulator has raised new concerns about the mortgage giant's accounting practices and internal controls.
Fannie Mae announced Wednesday that its regulator, the Office of Federal Housing Enterprise Oversight, is raising questions about how it classifies and transfers securities, the Washington Post reported.
These concerns are in addition to the accounting problems revealed last year that have already resulted in a $9 billion restatement of earnings and the resignation of two top executives.
Specifically, OFHEO is questioning whether Fannie Mae has classified some of its securities as “held-to-maturity,” when it actually plans to sell them. That practice would limit the volatility that short-term market value changes could create for the company's balance sheet. Another question is whether Fannie Mae transferred some securities to off-balance-sheet entities. OFHEO has asked whether the transfers “serve a valid business purpose,” the Post reported.
Fannie Mae's plan to boost its capital reserves 30 percent beyond what federal regulations require, ordered by OFHEO, was approved Wednesday. The company has already raised an additional $5 billion through a preferred stock offering. It will slash its lobbying budget and may cut its stock dividend to preserve cash, but only “as a last resort,” the company said.
The company did not say whether it expects to revise financial statements any further. "Fannie Mae's board and management believe that by tightly controlling balance sheet size, and applying additional retained earnings to capital, the company could exceed the surplus capital goal with a cushion for contingencies," said spokesman Charles V. Greener in a written statement. Click here to read the entire statement.
U.S. Rep. Richard H. Baker (R-La.), chairman of a House subcommittee overseeing Fannie Mae and Freddie Mac, said, "It's unfortunate that additional disclosures have been made that reflect on management deficiencies. Although disappointing, the disclosure could add momentum to the need to consider a new regulatory system."
Matthew Park of A.G. Edwards & Sons Inc., which owns Fannie Mae stock, told the Post, "The bigger issue is whether these are simply accounting disagreements or something more. It's not surprising when someone is looking through your garbage that they would find something. . . . We already knew about the $9 billion. But what the impact of these are is unclear. It's going to take time to sort through."