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Fannie Ads Slashed, More Accounting Woes

OFHEO says accounting inconsistent with GAAP

February 4, 2005

By MortgageDaily.com staff

Fannie Mae's regulator has found more accounting practices that are not consistent with generally accepted accounting principles. And an approved recapitalization plan slashes spending on advertising and lobbying.

The Office of Federal Housing Enterprise Oversight has identified several issues regarding Fannie's accounting policies, internal controls and financial reporting processes, Fannie announced Wednesday.

The issues pertain to securities accounting, loan accounting, consolidations, accounting for commitments, and practices to smooth certain income and expenses, according to the announcement.

"OFHEO indicated that it has not completed its review of all aspects of these issues, but has identified policies that it believes appear to be inconsistent with generally accepted accounting principles as well as internal control deficiencies that it believes raise safety and soundness concerns," Fannie said in the statement.

Additionally, OFHEO reportedly questioned the government sponsored enterprise's journal entry controls, systems limitations, database modifications, and new developments relating to FAS 91.

Fannie said its board and management are addressing the issues and concerns, and will report to the regulator regarding each of the matters as part of its ongoing internal reviews and its restatement process.

Last December, OFHEO classified the Washington, D.C.-based company as "significantly undercapitalized" and ordered the company to submit a capital restoration plan that would meet the agency's minimum capital requirement, as well as a 30 percent capital surplus.

Fannie did note that OFHEO approved its proposed capital restoration plan, which it began late December by issuing $5 billion in preferred stock and subsequently by halving its first quarter dividend.

The GSE reportedly intends to amass the capital surplus by Sept. 30, 2005 through "tightly controlling" total balance sheet asset size by reducing the portfolio principally through normal mortgage liquidations to limit overall minimum capital requirements, and by increasing core capital through retained earnings, including cost-cutting efforts such as its plan to "sharply curtail its corporate advertising campaign and use of political consultants."

The restoration plan provides a small "cushion" of capital above the 30 percent surplus as a contingency against events that might affect its ability to achieve that goal. In case the cushion is insufficient, Fannie said it will look to other things such as reducing mortgage portfolio balances, issuing additional preferred stock, and, as a last resort, a further reduction of the common stock dividend.

However, Fannie said, it believes that with its plan toward the balance sheet and application of retained earnings "the company could exceed the surplus capital goal with a cushion for contingencies."

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