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Fannie Mae Agrees To Accounting Changes Following Scathing Report

By Timothy L. O’Brien

The New York Times -- Fannie Mae, the nation’s largest mortgage buyer and a financial juggernaut that affects the lives of tens of millions of home buyers, agreed Monday to major changes in its accounting and management practices in an unusual deal reached after a week of negotiations with the company’s federal regulator.

The agreement comes after a scathing report released by the regulator last week that cited Fannie Mae for accounting irregularities and earnings manipulation that helped enrich the company’s senior executives and presented an apparently false portrait of its financial well-being to the public.

While the agreement is a rare concession by a powerful and politically astute company that has long resisted regulatory and congressional pressures to overhaul its practices and structure, analysts and others said it might be only the first of many changes at Fannie Mae, formerly known as the Federal National Mortgage Association.

The company is still the subject of a Securities and Exchange Commission investigation that may eventually extend to major Wall Street firms that have dealt with Fannie Mae. Congress is also planning its own hearings on Fannie Mae. And the Office of Federal Housing Enterprise Oversight, or OFHEO, the main agency responsible for drawing up the new regulatory agreement with Fannie Mae, is examining other accounting practices at the company, in addition to those cited in last week’s report, as well as board and managerial lapses, according to a person briefed on that examination.

Should further irregularities surface at Fannie Mae, the ramifications could be significant, not only for the company itself, but for the entire mortgage market, which has long depended on Fannie Mae’s financial muscle and presence to make widespread home ownership one of the cornerstones of American life.

For all of the questions currently swirling around Fannie Mae, its vast operations have helped keep mortgage rates low. Rather than lending money to prospective homeowners, Fannie Mae buys mortgages from banks that issue them, allowing those banks to make further mortgages and thereby keeping rates low and expanding the size of the market. So if Fannie Mae’s activities were curtailed as a result of the current investigations, mortgage rates may rise modestly, creating a political nightmare for members of Congress who may have to face the wrath of angry homeowners.

Fannie Mae’s size, and its government backing, also allow American homebuyers to enjoy mortgages with rates that are guaranteed for as long as 30 years, a financial benefit that is unavailable in most other countries where banks typically recalculate mortgage rates of borrowers monthly.

Among the most important changes Fannie Mae has agreed to is a requirement that it add more than $5 billion in fresh funds to its capital reserve within the next nine months, a move that would bring its total reserve to about $9.4 billion. The reserve functions as a financial cushion intended to protect the company, and insulate its balance sheet from unforeseen economic downturns or internal risks that might threaten its well-being.

A person briefed on the new agreement said that most of the added reserve was required to address regulatory concerns about internal problems at the company, not external economic threats -- suggesting that the company may have to make enormous restatements as it revises previously issued financial results.