Fannie Mae finally announced its long-awaited restatement of financial results for 2002, 2003, and the first two quarters of 2004, noting that it will reduce retained earnings by $6.3 billion. The mortgage giant also said that its previous estimate that errors in accounting for derivative instruments and mortgage commitments would result in a total of $10.8 billion in after-tax cumulative losses through December 31, 2004 was too high, and that the losses are closer to $7.9 billion.
What’s more, stockholders’ equity actually increased by $4.1 billion through June 30, 2004, compared to results previously reported. The hike is attributed to an increase in accumulated other comprehensive income (AOCI) that resulted from restatement adjustments that were greater than the reduction in retained earnings booked during those periods. The reduction was also tied to restatement adjustments.
Fannie also announced that its board increased the quarterly dividend to 40 cents per share, effective beginning in the fourth quarter. To meet that goal, it declared a special dividend of 14 cents per share, payable on December 29. The special dividend comes on the heels of its previously declared dividend of 26 cents paid on November 27.
“The restatement and results we filed today [December 6] mark a critical milestone in Fannie Mae’s progress toward building a stronger, better company for the housing finance system and our stakeholders,” President and Chief Executive Officer Daniel H. Mudd said, in a statement. “We are also pleased that we can begin to return capital to the owners of this enterprise—our shareholders. It is a first step towards restoring a competitive dividend. The topic of the dividend and capital management is one that will be staying on the Board’s agenda.”
Mudd said that the company will now concentrate on filing its results for 2005 and 2006 so it can be current on its reporting. However, as Fannie tries to move beyond its embarrassing accounting scandal, it still must contend with several critical issues that figure to dog the mortgage lender for several years.
For example, The New York Times reported Thursday that Federal regulators planned to file a lawsuit by year-end in an attempt to recover millions of dollars from Franklin D. Raines, Fannie’s former chairman and chief executive, and J. Timothy Howard, its former chief financial officer, who were fired in December 2004. “We will file charges within the next couple of weeks,” James B. Lockhart, director of the Office of Housing and Enterprise Oversight, told the paper. “Unfortunately, the legal process is very cumbersome.”
Meanwhile, The Wall Street Journal also reported on Thursday that in August, Thomas Inman, a former Fannie manager, filed a complaint with the Labor Department’s Occupational Safety and Health Administration alleging that the mortgage company’s problems are worse than what the company presented to its regulator. (OSHA investigates whistleblower claims.) The paper points out that in a previously undisclosed complaint, Inman contends that it was his job to identify errors, and that errors were being generated by a flawed system for accounting for costs associated with loans or securities Fannie Mae acquires from lenders. For example, Inman charged that he brought to Fannie Mae’s attention an expense that was overstated in late 2005 by at least $50 million, along with an “anomalous” $2.4 billion income item from early this year that Fannie Mae asserts that it has made full disclosures to regulators.
The company told the paper it has resolved the problems and now uses an updated accounting system.