Fannie Mae Accounting in Question

Federal regulators have found evidence suggesting that mortgage giant Fannie Mae manipulated earnings to facilitate bigger bonuses to executives, according to a lawmaker familiar with the findings.

In an eight-month investigation, the agency that supervises Fannie Mae found a pattern of manipulation aimed at smoothing out volatility in profit from quarter to quarter, similar to that which occurred at rival Freddie Mac -- whose understatement of billions in profit prompted a management shake-up and a $125-million government fine.

The agency, the Office of Federal Housing Enterprise Oversight, was presenting its new report criticizing Fannie Mae’s accounting practices to the board of the government-sponsored company Monday.

Rep. Richard H. Baker (R-La.) has been briefed on the oversight agency’s report, which provides “a strong indication that Fannie Mae manipulated earnings in a way that appears to be smoothing,” said Baker spokesman Michael DiResto.

DiResto was confirming a report in the Wall Street Journal.

He said Baker, who heads a House panel that oversees the two mortgage companies, had a “strong concern” that increasing executive bonuses might have been a factor behind the faulty accounting -- which he said the report presented as “a strong possibility.”

Oversight office spokeswoman Corinne Russell declined to comment, as did Janice Daue, a spokeswoman for Fannie Mae.

Fannie Mae’s chairman and chief executive, Franklin Raines, has defended the company’s accounting and said that it had unfairly suffered “collateral damage” from the accounting crisis at Freddie Mac.

Washington-based Fannie Mae is the second-largest U.S. financial institution behind Citigroup Inc. Its accounting came under scrutiny after Freddie Mac, its smaller rival in the multitrillion-dollar home mortgage market, disclosed in June 2003 that it had understated profit by $4.5 billion for 2000 to 2002 in an effort to smooth earnings and maintain its image as a steady performer.

The accounting crisis brought the ouster of several top Freddie Mac executives, investigations by the Justice Department and the Securities and Exchange Commission, and a record $125-million fine in a settlement with regulators. Although the regulators have found a similar “smoothing” pattern of earnings manipulation at Fannie Mae, there apparently was no evidence of built-up profit that had not been disclosed such as occurred at Freddie Mac, according to the report.

In October, Fannie Mae disclosed a $1.2-billion accounting error for the third quarter, which it said was due to a change in accounting rules and did not affect net income.

The company’s profit edged up nearly 1% in the second quarter of this year, beating analysts’ expectations, to $1.11 billion, or $1.10 a share, from $1.1 billion, or $1.09 a share, a year earlier.

Regulators told Fannie Mae this spring to add further criteria to its process for accounting for its investments in mobile homes and aircraft leases. The firm agreed to make the changes.

Fannie Mae and Freddie Mac were created by Congress to pump money into the home mortgage market by buying home loans from lenders and packaging them as securities for sale on Wall Street.