Accounting & Tax

New Accounting Questions for Fannie Mae

There also may be evidence that the company bought finite insurance policies to hide losses after they were incurred.
Stephen TaubSeptember 29, 2005

Investigators examining the books of mortgage giant Fannie Mae have found new and pervasive accounting violations, including evidence that the company may have overvalued assets, underreported credit losses, and misused tax credits, according Dow Jones, which cited unnamed people close to the probe.

There also may be evidence that the company bought finite insurance policies to hide losses after they were incurred, the wire service reported.

Dow Jones pointed out that its sources did not provide details about the violations or their magnitude, but it stressed that these are new violations, designed to embellish the company’s earnings.

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The wire service noted that questions have been raised about Fannie’s booking of certain tax credits and their effect on the company’s tax bill. Fannie Mae reportedly reduced its corporate-tax rate in 2003 from a statutory minimum of 35 percent to an effective rate of 26 percent by recording $988 million in tax credits and an additional $479 million from tax-exempt investments.

Meanwhile, Fannie Mae investigators may need until January to complete their report on as much as $10.8 billion in accounting errors, reported Bloomberg, citing former U.S. senator Warren Rudman, who’s heading the investigation. Fannie Mae hasn’t filed a quarterly report with the Securities and Exchange Commission since August 9, 2004. Last December it was ordered by the SEC to restate its financials from 2001 through mid-2004, reducing the company’s earnings by about $9 billion.

Separately, the company issued a statement asserting that “OFHEO has determined that Fannie Mae was adequately capitalized at the end of the second quarter of this year.” Last year, OFHEO — Fannie Mae’s federal regulator, the Office of Federal Housing Enterprise Oversight — required that the mortgage company attain a 30 percent capital surplus; Fannie Mae’s statement also noted that it is on track to meet that goal by the September 30 deadline.