Fannie Mae, the giant housing finance company, has improperly accounted for some of the loans in its $1 trillion portfolio, a federal regulator said yesterday.
The Office of Federal Housing Enterprise Oversight, which regulates Fannie Mae, ordered the company to recalculate losses on those loans by May 14. The recalculation could force Fannie Mae to restate its profits downward, although the oversight office did not order that.
It is not yet clear how large a restatement Fannie Mae might have to make. The bonds under scrutiny include $8 billion in securities backed by mobile homes and $300 million backed by aircraft leases. Although the securities make up less than 1 percent of Fannie Mae's portfolio, they have become a focus for critics who say Fannie Mae hides losses and is riskier than it appears.
The order yesterday came in a letter from Armando Falcon, director of the oversight office, to Franklin D. Raines, chairman of Fannie Mae. In the letter, Falcon also said that the oversight office was continuing a broader inquiry into Fannie Mae's accounting.
In a statement, Fannie Mae said it would give the oversight office "the information required within the time frame requested," and said it was seeking guidance from the Securities and Exchange Commission.
With $1 trillion in assets at the end of 2003, Fannie Mae is the third-largest financial institution in the United States, behind Citigroup and Bank of America.
Fannie Mae and Freddie Mac, its corporate cousin, are government-sponsored companies that play a crucial role in the home mortgage market. They buy mortgages from banks and other lenders with money that they borrow from investors around the world. Most of their profits come from the difference in interest rates between the mortgages that they buy and the bonds they issue.
The loans under scrutiny by the oversight office are not regular home mortgages, but bonds backed by mobile homes and aircraft leases. Even if the company were forced to restate their value, the change is expected to have little effect on its overall financial position.
But the demand from Falcon adds to the political and business pressure on Fannie Mae, an unusual company that benefits from being closely associated with the federal government.
Fannie Mae has said that its accounting methods are proper. Both KPMG LLP, its auditor, and Ernst & Young LLP, an auditor retained by Fannie's outside counsel, say its accounting practices comply with accepted standards, the company said yesterday.
