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Last Updated: Thursday, 16 December, 2004, 22:25 GMT
Fannie Mae 'should restate books'
Outside of US house painted in stars and stripes
The US mortgage industry has been shaken by the investigations
US mortgage company Fannie Mae should restate its earnings, the US finance watchdog has said, a move that could put a major dent in its finances

The Securities & Exchange Commission accused Fannie Mae of using techniques that "did not comply in material respects" with accounting standards.

Last month Fannie Mae warned that the problems could cost it $9bn (4.6bn).

Fannie Mae shares fell $1.39 to close at $69.30 on Thursday at the New York Stock Exchange.

The other main US mortgage firm Freddie Mac restated earnings by $5bn last year after a probe of its books.

The SEC's comments are likely to increase pressure on Congress to strengthen supervision of Fannie Mae and Freddie Mac.

The move is also likely to be seen as a blow to Fannie Mae chief executive Franklin Raines who has defended his firm's accounting practices to policymakers.

A Fannie Mae spokesman said that the company "will take the steps necessary to comply fully with the SEC's determination".

Cornerstones

Fannie Mae and Freddie Mac are key parts of the US financial system.

They effectively underwrite the mortgage market, financing nearly half of all American house purchases and dealing actively in bonds and other financial instruments.

I have advised that... to provide investors with appropriate information, Fannie Mae should restate its financial statements
Donald Nicolaisen, SEC chief accountant

An investigation of Freddie Mac in June 2003 sparked concerns about the wider health of the industry and the role of its main regulator the Office of Federal Housing Enterprise Oversight (OFHEO).

Having been pricked into action, the OFHEO turned its attention to Fannie May.

In September this year the OFHEO announced that the firm had tweaked its books to spread earnings more smoothly across quarters and play down the amount of risk it had taken on.

The SEC found similar problems in the months between 2001 and mid-2004.

The watchdog's chief accountant Donald Nicolaisen said that "Fannie Mae's methodology of assessing, measuring and documenting hedge ineffectiveness was inadequate and was not supported" by generally accepted accounting principles.

He continued that the company should "restate its financial statements filed with the commission to eliminate the use of hedge accounting" among other step.

As a result, he said he had "advised that... to provide investors with appropriate information, Fannie Mae should restate its financial statements".



SEE ALSO:
US housing giant restates profits
25 Jun 03 |  Business
New probe into US housing giant
12 Jun 03 |  Business
Heads roll at US mortgage giant
09 Jun 03 |  Business


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