Accounting & Tax

SEC Orders Fannie Mae to Restate

The announcement will very likely result in the departure of senior management at the mortgage giant, according to reports.
Stephen TaubDecember 17, 2004

Securities and Exchange Commission chief accountant Donald Nicolaisen has called on the Federal National Mortgage Association (Fannie Mae) to restate its financials from 2001 through mid-2004 to eliminate the use of hedge accounting.

“Our review indicates that during the period Fannie Mae’s accounting practices did not comply in material respects with the accounting requirements in Statement Nos. 91 and 133,” he stated in a press release. The first standard concerns deferred purchase-price adjustments; the second deals with hedge accounting for derivatives transactions.

The restatement could amount to $9 billion; last month the mortgage giant announced in an SEC filing that it would record an after-tax loss in that amount if it did not qualify for hedge accounting for all periods since its January 1, 2001 adoption of FAS 133.

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Nicolaisen’s announcement would very likely result in the departure of senior management at Fannie Mae, according to The Wall Street Journal. Bloomberg also cited a research note by JPMorgan Securities analyst George Sacco that “management’s future with Fannie is likely to be tenuous given the magnitude of the restatement and its repeated defense of its accounting policies.”

A spokesman for the mortgage lender declined to comment on whether chairman and chief executive officer Franklin D. Raines or chief financial officer Timothy Howard will resign.

In the SEC press release, Nicolaisen said that regarding Statement No. 91, Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases, “Fannie Mae failed to record timely adjustments to the recorded amount of its loans based on changes in the estimated speed with which those loans would be prepaid.”

Regarding Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, Fannie Mae’s unique methodology to assess whether hedge accounting was appropriate “did not qualify for hedge accounting because of deficiencies in its application” of the rule. “Among other things, Fannie Mae’s methodology of assessing, measuring, and documenting hedge ineffectiveness was inadequate and was not supported by the statement,” added Nicolaisen. He acknowledged that the mortgage lender is working with an outside adviser to amend its hedge accounting practices.

The Journal also reported that the restatement could push Fannie Mae below the minimum capital requirements set by its regulators, forcing it to sell some of its more than $900 billion of mortgage-related holdings to raise capital.