Accounting Observer > Public Blog - Fannie Mae: The Plot Thickens

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Fannie Mae: The Plot Thickens

Location: Blogs AAO Weblog (Public)
Posted by: Jack Ciesielski	2/23/2005 4:12 PM
Fannie Mae released news today on their ongoing examination by the Office of Federal Housing Enterprise Oversight. Oddly, there was no mention of the progress on the OFHEO website. Asymmetrical information. While Fannie reported its progress on climbing out of its "undercapitalized" hole by September 30, 2005, you have to be slightly skeptical: the restatement of its financials is not yet complete, so how badly undercapitalized might it really be? Or looking at it the other way, depending how the accounting issues play out: is it as undercapitalized as it seems right now? This sobering excerpt from the press release: "OFHEO also has notified Fannie Mae's Board of Directors and management of several accounting and internal control issues and questions the agency has identified in its ongoing special examination, and directed that these matters be included in the internal reviews by Fannie Mae's board and management and reviewed by the company's external auditor. 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. The issues and questions pertain to the following areas: securities accounting, loan accounting, consolidations, accounting for commitments, and practices to smooth certain income and expense amounts. OFHEO also raised concerns regarding journal entry controls, systems limitations, and database modifications, as well as new developments relating to FAS 91." Well - what's left? Not to throw cold water on Fannie's capital improvement plans, but all of these accounting issues really relate to the fundamentals of how Fannie makes her bread. Take a look at the summary of issues and questions in the press release: you've got your Statement 115 issues. You've got your Statement 140 (securitizations) issues. You've got your Statement 65 (mortgage banking activities) issues. You've got your Statement 149 & 133 matters (derivatives). You've got more of your Statement 91 issues (interest income recognition - already a known problem of unknown proportions). And for good measure, throw in issues on timing of recognition of certain income and expense amounts. The true under-or-overcapitalization of Fannie Mae won't be known until this examination is complete.

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