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1 (December 7, 2006)

handle is hein.crs/crsaiqz0001 and id is 1 raw text is: Order Code RS21949 Updated December 7, 2006 Accounting Problems at Fannie Mae Mark Jickling Specialist in Public Finance Government and Finance Division Summary On September 22, 2004, the Office of Federal Housing Enterprise Supervision (OFHEO) made public a report that charged Fannie Mae, the government-sponsored enterprise that plays a leading role in the secondary mortgage market, with not following generally accepted accounting practices in several critical areas, which allowed Fannie Mae to conceal losses, reduce volatility in reported earnings, present investors with an artificial picture of steadily growing profits, and meet financial performance targets that triggered the payment of large bonuses to company executives. Fannie Mae's initial response was to argue that OFHEO's charges involved not improprieties, but merely differing interpretations of highly complex accounting standards. However, on December 15, 2004, the Securities and Exchange Commission (SEC), after finding inadequacies in Fannie's accounting policies and methodologies, supported OFHEO and directed Fannie Mae to restate its accounting results since 2001. Shortly thereafter, the company's CEO and CFO resigned. In May 2006, Fannie Mae reached a settlement with OFHEO and the SEC, agreeing to pay $400 million in civil penalties, undertake a number of remedial steps related to internal controls and oversight of accounting systems, not increase the size of its mortgage portfolio without OFHEO's approval, and be enjoined from future violations of securities laws. In December 2006, Fannie issued the restatement, which reduced reported earnings for 2001-2004 by $6.3 billion. This report will be updated as events warrant. Background Fannie Mae and Freddie Mac, the two government-sponsored enterprises (GSEs) that dominate the secondary mortgage market, are huge and complex financial institutions that play a key role in the financial system. Most home mortgage loans made each year are purchased by one or the other of the GSEs and either held in portfolio or repackaged and sold as mortgage-backed securities (MBS). Large quantities of GSE bonds are held by insured banks, pension funds, and investors of all types. Although GSE debt is not guaranteed by the government, the government sponsored status of Fannie and Freddie leads market participants to put faith in an implicit guarantee, a belief that the Treasury will never allow either GSE to default on its obligations.

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