Regulator Seeks Changes to Fannie Mae’s Old Accounting Systems

Fannie Mae’s federal regulator said that the mortgage giant relies on manual accounting systems so outmoded that they could lead to problems akin to October’s $1.1 billion financial reporting error.

The Office of Federal Housing Enterprise Oversight (Ofheo) said in a letter to Fannie Mae Tuesday that its use of 70 out-of-date manual systems, rather than automated and integrated ones, raises concern. The $1.1 billion error stemmed from a manual system that was being used to account for part of the company's derivatives business, the Wall Street Journal reported.

The agency told Fannie Mae officials to submit a remediation plan within 30 days. Ofheo also plans a complete review of the company’s accounting practices.

Manual accounting systems are more prone to human error because they are separate from the main accounting program and allow for manual overrides. Because those systems require more review and oversight, they take resources away from other accounting duties.

Fannie Mae spokesman Chuck Greener said in response that "virtually every financial institution in America" has similar manual systems, also known as end-user systems, the Journal reported. Greener said the company is "very comfortable we will be able to respond to Ofheo's request fully."

The Senate Banking Committee is preparing legislation that would create stricter oversight of Fannie Mae, its mortage-market sibling Freddie Mac and the Federal Home Loan Bank System.

In testimony before the committee on Monday, Alan Greenspan suggested curbs on the debt carried by Fannie Mae and Freddie Mac. He said they pose "very serious" risks to the U.S. financial system because of the large amount of mortgage loans on their books and the huge amount of federally subsidized debt used to purchase them. Fannie Mae Chairman Franklin Raines said Fannie Mae protects itself against risk better than banks do, and he urged Congress to avoid undue controls on Fannie Mae’s growth.

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