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Accounting Problems at Fannie Mae , Record No.: RS21949, Date: November 15, 2005 1 (November 15, 2005)

handle is hein.tera/crser0097 and id is 1 raw text is: Order Code RS21949 Updated November 15, 2005 CRS Report for Congress Received through the CRS Web 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 was highly critical of accounting methods at Fannie Mae, the government-sponsored enterprise that plays a leading role in the secondary mortgage market. OFHEO charged Fannie Mae with not following generally accepted accounting practices in two critical areas: (1) amortization of discounts, premiums, and fees involved in the purchase of home mortgages and (2) accounting for financial derivatives contracts. According to OFHEO, these deviations from standard accounting rules allowed Fannie Mae to reduce volatility in reported earnings, present investors with an artificial picture of steadily growing profits, and, in at least one case, to meet financial performance targets that triggered the payment of bonuses to company executives. On November 15, 2004, Fannie Mae reported that it was unable to file a third-quarter earnings statement because its auditor, KPMG, refused to sign off on the accounting results. On December 15, 2004, the Securities and Exchange Commission (SEC), after finding inadequacies in Fannie's accounting policies and methodologies, directed Fannie Mae to restate its accounting results since 2001. Shortly thereafter, the company's CEO and CFO resigned. It is estimated that earnings since 2001 will be revised downwards by as much as $12 billion, but the formal restatement of earnings is not expected before late 2006. 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). The two GSEs have about $1.6 trillion in debt outstanding, and large quantities of GSE bonds are held by insured banks, pension funds, and investors of all types. While 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. Congressional Research Service oe The Library of Congress

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