Fannie Mae class action

[FaGal]

Attorney General Jim Petro Files Securities Fraud Class Action Suit Against Fannie Mae and Its Executive Officers

PR Newswire via NewsEdge Corporation : COLUMBUS, Ohio, Nov. 19 /PRNewswire/ -- Ohio Attorney General Jim Petro today filed a securities fraud class action lawsuit in federal court on behalf of the State of Ohio and all other shareholders in the Federal National Mortgage Association (Fannie Mae) (NYSE: FNM), alleging that the mortgage buyer manipulated its earnings to artificially inflate the price of its common stock.

Petro filed suit against Fannie Mae, one of the largest financial institutions in the world, and its top executives in the United States District Court, Southern District of Ohio (Eastern Division), on behalf of the Ohio Public Employees Retirement System, State Teachers Retirement System of Ohio, Ohio Bureau of Workers' Compensation and all other purchasers of Fannie Mae common stock from Oct. 11, 2000, through Sept. 22, 2004.

These defendants manipulated earnings in a fraudulent scheme to deceive investors about Fannie Mae's true financial state. This deception could cost shareholders billions of dollars, Petro said. STRS, OPERS and BWC are to be congratulated for holding Fannie Mae accountable for these unscrupulous acts.

The complaint alleges that Fannie Mae and its top executives -- Franklin D. Raines, J. Timothy Howard and Leanne G. Spencer -- artificially inflated the company's publicly traded common stock through false public financial statements. Because these executives were compensated primarily on Fannie Mae's stock performance, this artificially high stock price allowed the executives to get rich at the expense of the company's shareholders, Petro said.

In violation of The Securities Exchange Act and Securities and Exchange Commission rules, Fannie Mae and its officers did not disclose that the company:.TABLE - failed to apply generally accepted accounting procedures; - lacked sufficient internal auditing controls; - failed to report the volatility of the company's earnings.

The federal agency charged with overseeing Fannie Mae stated its findings were not simply differences in interpretation of accounting principles. Rather, the findings demonstrated clear instances in which management sought to misapply and ignore accounting principles for the purposes of meeting investment analyst expectations; reducing volatility in reporting earnings; and enabling fragmented processes and systems and an ineffective controls environment to exist. CONTACT: Michelle Gatchell, Attorney General's Office, at (614) 466-3840 or (614) 679-7819; Kim Norris, Attorney General's Office, Director of Communications, (614) 361-0202, http://www.ag.state.oh.us

SOURCE State of Ohio Office of the Attorney General

-0- 11/19/2004

/CONTACT: Michelle Gatchell, +1-614-466-3840, or +1-614-679-7819, or Kim Norris, Director of Communications, +1-614-361-0202, both of the Attorney General's Office/

/Web site: http://www.ag.state.oh.us /

(FNM)

CO: State of Ohio Office of the Attorney General; Federal National Mortgage

ST: Ohio

IN: FIN

SU: LAW

JT-JK

-- CLF044 --

4027 11/19/2004 17:21 EST http://www.prnewswire.com .end (paragraph)<<PR Newswire -- 11/19/04>>

[FaGal]

Feds Order Fannie to Forfeit Gains

Mon Nov 29,10:51 PM ET

Add to My Yahoo! Business - AP

WASHINGTON - Fannie Mae, eager to unload a batch of fraudulent loans it bought from one of its authorized lenders, turned a blind eye as independent lender James McLean resold the bogus notes to Ginnie Mae in one of the nation's largest mortgage schemes, according to the Justice Department (news - web sites) and federal housing officials


"Fannie should have been a better citizen in advising the respective regulatory agencies of the potential fraud that existed here," said Kenneth Donohue, the top cop for the Department of Housing and Urban Development (news - web sites). "The coordination between these agencies is paramount to make sure these cases don't happen or don't get worse."

Last month, a U.S. District Court in Charlotte, N.C., in a sealed ruling, ordered Fannie to forfeit $6.5 million in "criminally derived" gains received from McLean's First Beneficial Mortgage Co.

A company official declined to say whether Fannie will fight the forfeiture order. However, he said the company recently sought and received a 60-day extension on its Nov. 22 deadline to respond.

Judge Lacy Thornburg also directed the Federal Reserve (news - web sites) Bank of New York to temporarily freeze the assets in Fannie's account there.

Thornburg also ordered both the bank and Fannie to preserve evidence, turn over documents and provide witness testimony to federal law enforcement officials investigating Fannie's role in a mortgage scheme that defrauded the U.S. government, through Ginnie, formerly known as the Government National Mortgage Association, out of more than $30 million.

Ginnie Mae was spun off from Fannie in the late 1960s when lawmakers decided to split the government-sponsored enterprise, or GSE, into two companies — one that was privately owned and operated, Fannie — and one the government retained full control over, Ginnie.

Both are prohibited from lending directly to the public and, instead, buy or guarantee mortgages and mortgage-backed securities from primary lenders. Ginnie specifically guarantees payment on loans insured by the U.S. government through the Federal Housing Administration and the Veterans Administration.

Though private, Fannie and Freddie Mac, which was created as a competitor in the 1970s, have a public mandate to lower the costs of homeownership, especially for lower-income and minority borrowers.

[FaGal]

Fannie Mae Agrees to Forfeit $7.5 Million

General Financial/ Business News via NewsEdge Corporation : WASHINGTON_Fannie Mae has agreed to forfeit some $7.5 million in an accord with the Justice Department, which had accused the mortgage giant of accepting money it knew had been lost by a federal agency in a fraud scheme.

The government-sponsored company did not admit wrongdoing in the consent order announced Wednesday.

A federal judge in Charlotte, N.C., had previously ordered Fannie Mae to forfeit $6.5 million in the case involving mortgages it purchased from First Beneficial Mortgage Corp., calling the money proceeds of a criminal conspiracy. The defrauded government agency was said to have been Ginnie Mae, which finances housing.

The $7.5 million that the company agreed to pay in the consent order represents the $6.5 million ordered by the judge plus about $978,000 in interest. The money will go to Ginnie Mae as partial restitution for the $23 million it is said to have lost as a result of the mortgage fraud scheme carried out in 1998-2000.

Fannie Mae does not wish to retain the funds or benefit from First Beneficial's illegal activities, company spokesman Chuck Greener said in a statement. He said the consent agreement brings a swift, appropriate and cooperative end for the United States and Fannie Mae in this matter.

A federal trial in 2002 in North Carolina showed that now-defunct First Beneficial had defrauded Fannie Mae under a mortgage scheme using phony borrowers and other deceptions. When officials of Fannie Mae, which had paid millions of dollars to buy the mortgages, learned that they were fraudulent, the company demanded that First Beneficial buy them back, the government said. First Beneficial got the money to repay Fannie Mae by using a similar scheme to sell them to Ginnie Mae, it said.

Justice Department attorneys have said that Fannie Mae should have told Ginnie Mae that the mortgages were bogus.

The government has substantial evidence that high-level officials of Fannie Mae had direct knowledge of the fact that the funds Fannie Mae received ... were fraudulently obtained from Ginnie Mae, the department said in a motion filed with the court in October.

The Justice Department will seek no further funds in the matter from Fannie Mae, which it described in the consent order as itself a victim of a mortgage fraud scheme.

The department said, however, that the order does not in any way bind or limit the jurisdiction of, or current or future activities of, any federal, state or local entity. Other purported victims of the mortgage scheme could bring legal claims against Washington-based Fannie Mae, which finances one of every five home loans in the United States and is the second-largest financial institution in the country behind Citigroup.

James E. McLean, who was the president of Charlotte-based First Beneficial, was convicted after a nine-day trial in 2002 on federal charges including conspiracy, bank fraud and money laundering. He was sentenced a year ago to 21 years in prison and ordered to pay more than $23 million in restitution. His wife, Macy McLean, and Paul Zimmerman and his wife Debbie Zimmerman also were convicted in connection with the fraud scheme.

Prosecutors said the defendants recruited people to sign their names to mortgage papers with First Beneficial, telling them they never would have to make any payments on the fictitious loans. In many cases, the properties identified in the fake mortgages were vacant and not owned by the named borrowers at the time the mortgages were sold to Fannie Mae and Ginnie Mae, the prosecutors said.

By selling the phony mortgages to Fannie Mae and Ginnie Mae, they said, the McLeans and the Zimmermans collected lump-sum payments for the entire principal amount of the mortgages.

The case is unrelated to the Justice Department's criminal investigation of Fannie Mae's accounting, which also is under scrutiny by the Securities and Exchange Commission.

Last month, the company missed a regulatory deadline for filing its third-quarter financial results after its independent auditor KPMG refused to sign off on the report. Fannie Mae also acknowledged that some of its accounting practices don't comply with generally accepted accounting principles. The company said it would show a net loss of $9 billion if the SEC decides that it has improperly accounted for derivatives, the financial instruments it uses to hedge against interest-rate swings.

__

On the Net:

Fannie Mae: http://www.fanniemae.com

Justice Department: http://www.usdoj.gov

Securities and Exchange Commission: http://www.sec.gov .end (paragraph)<<General Financial/ Business News -- 12/08/04>>

[FaGal]

Fannie Mae si piega alla Sec
il rischio è riconoscere 9 miliardi di dollari perdite

Weil e Kopecki
WSJ Europa su MF di
venerdì 17 dicembre u.s.


La Sec ha stabilito che Fannie Mae ha violato i regolamenti contabili statunitensi e dovrà riformare i propri rendiconti finanziari degli ultimi quattro anni.
La decisione obbligherà il colosso dei mutui immobiliari a riconoscere circa 9 miliardi di $ di perdite, probabilmente già nel prossimo bilancio trimestrale. La società potrebbe anche spingere a operare cambiamenti nelle proprie sfere dirigenziali ed ad acconsentire alle richieste dell'ammnistrazione Bush di sottostare a regolamenti più severi. Un portavoce di Fannie ha dichiarato che la società rispettare la decisione della Sec, ma non ha rivelato se il presidente e amministratore delegato, o il responsabile amministrativo e finanziario della società, presenteranno le dimissioni. I risultati della indagine della Sec hanno rafforzato la posizione della amministrazione Bush che vuole istituire un organo di regolamentazione per la supervisione di Fannie e della rivale Fannie Mac. lo scandalo contabile che l'anno scorso ha travolto Fannie ha indotto a licenziare diversi dirigenti e a riformulare i propri rendiconti finanziari. Si ritiene che riformulando i propri rendiconti, Fannie non sarà più in grdo di soddisfare i requisiti minimi di capitale stabiliti dai suoi organi di vigilanza. La società, che per i primi nove mesi di quest'anno ha riportato entrate per 5,43 miliardi di $, dovrà probabilmente vendere una parte delle proprie partecipazioni ipotecarie, il cui valoresupera i 900 miliardi di dollari, per raccogliere nuovo capitale. La notizia offusca ulteriormente l'immagine della società che da tempo sta cercando di apparire come un organismo sano, che aiuta gli indigenti a comprare casa. La decisione della Sec colpisce duramente anche il revisore finanziario di Fannie, la KPMG, già oggetto di un'indagine penale da parte della giuria federale di New York relativa alle sue precedenti pratiche di vendita di scudi fiscali. Fannie e Freddie detengono o garantiscono i pagamenti su circa la quasi metà dei quasi 8 mila miliardi di mutui immobiliari negli Usa. La maggior parte degli analisti, tuttavia ritiene che i problemi finanziari di fannie non avranno gravi conseguenze per il mercato ipotecario statunitense. Anche gli investitori che hanno acquistato il debito emesso da Fannie e Freddie hanno reagito con pacatezza alla controversia contabile degli ultimi mesi, concludendo che le misure di regolamentazione renderanno le due società meno rischiose. Fannie e Freddie, le cui azioni vengono scambiate al Nyse, sono state autorizzate dal congresso a immettere denaro nel mercato immobiliare. Entrambe acquistano mutui immobiliari dalle banche e da altri istituti di credito, tenendone alcuni nei propri portafogli e vendone gli altri altri agli investitori sotto forma di titoli. La rapida crescita delle due società è stata alimentata dalla radicata convinzione degli investitori che il governo federale avrebbe sicuramente salvato le due società nel caso in cui fossero incappate in problemi di solvenza. Negli ultimi anni gli esponenti della Fed hanno cerato di sradicare questa convinzione, ma con scarso successo. oggi le due società continuano a beneficiare di costi di capitali molto inferiori rispetto agli altri istituti finanziari e sono sottoposte a requisiti di capitale meno rigorosi rispetto alle banche commerciali o agli operatori in titoli di stato. In un rapporto divulgato venerdì sera da Donald T. Nicolaisen, responsabile della contabilità della Sec, si afferma che l'organismo ha stabilito che nel periodo preso in esame, dal 2001 alla metà del 2004, le pratiche contabili di Fannie "violavano in modo sostanziale" i regolamenti contabili. I risultati dell'indagine della Sec riguardano due principi contabili conosciuti come Financial Accounting Standard 133 e 91. Il Fas 133 definisce i requisiti per la contabilizzazione dei profitti e perdite sui contratti derivati, di cui Fannie fa largo uso per tutelarsi dalle variazioni dei tassi di interesse. Sia la Sec che l'Ofheo hanno scoperto che Fannie ha contabilizzato questi contratti in modo errato, applicando le regole in modo tale da poter distribuire le perdite su diversi anni anzichè contabilizzarle in un'unica soluzione. Fannie ha utilizzato un metodo "personalizzato" per stabilire se era in possesso dei requisiti necessari per ricorrere al cd. hedge accounting (operazioni di copertura) che le avrebbe permesso di distruibire le perdite. Tuttavia la Sec ha dichiarato che Fannie non ha adottato le misure necessarie per risultare idonea all'utilizzo dell'hedge accounting. In novembre Fannie aveva dichiarto che se la Sec avesse accertato la sua non conformità alle regole di hedge accounting, la società sarebbe stata costretta ad accontanare una perdita cumulativa netta di circa 9 miliardi di dollari dal 1 gennaio 2001, quando la società ha iniziato ad applicare il 133 Fas. Il Fas 91 stabilisce le regole per individuare determinate spese relative ad investimenti immobiliari e in altri titoli. L'Ofheo ha inoltre accusato Fannie Mae di aver ritardato l'identificazione di alcune spese che avrebbe dovuto essere contabilizzate nel 1998. Quell'anno, infatti, il crollo dei tassi di interesse aveva indotto molti titolari di immobili a rifinanziare i propri mutui o a prendere in considerazione l'idea di farlo. A ogni sostanziale variazione dei tassi d'interesse, Fannie deve rivedere le proprie posizioni riguardo ai tassi ai quali i prestiti saranno estinti, previsioni che stabiliscono le tempistiche con cui la società deve identificare determinate spese relative a questi prestiti. In base ai modelli computerizzati di Fannie, alla fine del 1998 la società avrebbe dovuto rilevare spese per 400 milioni di dollari, ha riferito l'Ofheo. Invece di contabilizzare l'intero importo nel 1998, la società avrebbe deciso di contabilizzare spese solo per 200 mllioni di dollari. se avesse fatto diversamente, raines e altri quattro dirigenti della società non avrebbero potuto godere di un bonus di 6 milioni di dollari per il 1998. Fannie è ancora oggetto dell'indagine avviata dall'Ofheo e, dall'inizio di quest'anno, anche di un'indagine aperta dal dipartimento di giustizia statunitense in seguito alla divulgazione del rapporto dell'Ofheo. Josh rosner, analista della Medley Global Advisors, una società di ricerca finanziaria di New York, ha dichiarato che la decisione della Sec è solo <<la punta dell'iceberg>> dei problemi normativi che affliggono le società

[FaGal]

http://www.trinity.edu/rjensen/casea....htm#FannieMae

[FaGal]

Office of the Chief Accountant Issues Statement on Fannie Mae Accounting
FOR IMMEDIATE RELEASE
2004-172

Washington, D.C., Dec. 15, 2004 — Donald T. Nicolaisen, Chief Accountant for the Securities and Exchange Commission (Commission), issued the following statement regarding the compliance of the Federal National Mortgage Association's (Fannie Mae) accounting practices for deferred purchase price adjustments and for derivatives and hedging activities with Statement of Financial Accounting Standards No. 91, "Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases" (Statement No. 91), and Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (Statement No. 133):

At the request of Fannie Mae, the accounting staff at the Commission has been reviewing whether the accounting used by Fannie Mae complied with Statement Nos. 91 and 133.

The Office of Federal Housing Enterprise Oversight (OFHEO), Fannie Mae's safety and soundness regulator, has reviewed several of Fannie Mae's accounting practices, focusing on the implications of those practices on the adequacy of Fannie Mae's regulatory capital, the quality of its management, and the overall safety and soundness of the enterprise. OFHEO issued a preliminary report of its findings on September 17, 2004.

Following the issuance of OFHEO's report, Fannie Mae sought guidance from the Commission's accounting staff regarding accounting policy matters associated with Fannie Mae's compliance with Statement Nos. 91 and 133. Although it is unusual for the accounting staff to provide such guidance while there are pending investigations by the Commission and other agencies, Fannie Mae requested our guidance because, in its view, these accounting issues have received extraordinary public attention and resulted in the mortgage and capital markets experiencing uncertainty. Fannie Mae did not ask the accounting staff to express any views on factual matters or matters that require factual development and, in providing the requested guidance, we are not expressing any such views. The staff's guidance is based solely on information voluntarily provided by Fannie Mae and OFHEO.

In light of the public attention and uncertainties cited by Fannie Mae in its request, and other matters involving Fannie Mae that are publicly available, including OFHEO's report, we are issuing this statement of the staff's views. The issues considered by the SEC staff were not the appropriateness of Fannie Mae's business decisions to use financial or derivative instruments or to hedge its risks, but whether the accounting used to record those transactions complied with Statement Nos. 91 and 133.

Our review indicates that during the period under our review, from 2001 to mid-2004, Fannie Mae's accounting practices did not comply in material respects with the accounting requirements in Statement Nos. 91 and 133.

Regarding Statement No. 91, during the period under the SEC staff's review, Fannie Mae failed to record timely adjustments to the recorded amount of its loans based on changes in the estimated speed with which those loans would be prepaid. Among other requirements, Statement No. 91 provides that when applying the method used by Fannie Mae an entity should use its best estimate of expected prepayment rates in calculating the carrying amount of its loans. Fannie Mae previously had concluded that its methodology for performing these calculations for interim balance sheet dates in the periods 2001 through 2002 was not consistent with Statement No. 91, and has stated that it has changed its accounting policies to, among other things, calculate the amounts based on quarter-end positions rather than projected year-end positions.

It also appears that, contrary to Statement No. 91, Fannie Mae recognized adjustments to the carrying amount of its loans only if they exceeded a self-defined materiality limit, referred to as a "precision threshold." Fannie Mae has represented to the Commission staff that it has initiated further changes to eliminate the "precision threshold" and is working with OFHEO to further amend its accounting practices under Statement No. 91.

Regarding Statement No. 133, one of the principles underlying the statement is that derivative instruments are to be recorded at their fair value with changes in fair value reported in earnings. If certain hedge criteria are met, however, Statement No. 133 affords special accounting for the hedge relationship. If the specific hedging requirements are not met, then special hedge accounting is not appropriate.

Fannie Mae internally developed its own unique methodology to assess whether hedge accounting was appropriate. Fannie Mae's methodology, however, did not qualify for hedge accounting because of deficiencies in its application of Statement No. 133. Among other things, Fannie Mae's methodology of assessing, measuring, and documenting hedge ineffectiveness was inadequate and was not supported by the Statement.

We understand that Fannie Mae is working with an outside adviser to amend its hedge accounting practices and develop an appropriate approach to hedge accounting under Statement No. 133.

This evening, therefore, I have advised Fannie Mae that, to be consistent with Statement Nos. 91 and 133 and to provide investors with appropriate information, Fannie Mae should:

* Restate its financial statements filed with the Commission to eliminate the use of hedge accounting.

* Evaluate the accounting under Statement No. 91 and restate its financial statements filed with the Commission if the amounts required for correction are material.

* Re-evaluate the information prepared under generally accepted accounting principles (GAAP) and non-GAAP information that Fannie Mae previously provided to investors, particularly in view of the decision that hedge accounting is not appropriate.

I appreciate the cooperation extended by Fannie Mae and OFHEO during our review and their willingness to provide us with information and detailed explanations of their views. It is my understanding that investigations into these and related matters by Fannie Mae's special review committee, the Commission, and others are continuing.



http://www.sec.gov/news/press/2004-172.htm

[FaGal]

Fannie Mae la Sec colpisce duro



È l’ennesima umiliazione per Fannie Mae, il gigante americano dei mutui con ricavi pari a 5,43 miliardi di dollari nei primi nove mesi di quest’anno. La Sec, la commissione di controllo sulle società quotate, ha stabilito che la società ha violato le vigenti norme sulla contabilità e dovrà riassestare i suoi ricavi per gli ultimi quattro anni. Questa decisione obbligherà Fannie Mae a riconoscere e contabilizzare un buco stimato tra 6,7 e 9 miliardi di dollari, che derivano interamente da perdite su derivati. La contabilizzazione avverrà probabilmente già nella prossima trimestrale. Ciò comporterà quasi sicuramente per Fannie Mae la necessità di ricapitalizzarsi.
È da tempo che Fannie Mae e la sua più piccola rivale, Freddie Mac, sono sotto i riflettori della Sec e della pubblica opinione. Freddie Mac, in particolare, era passata lo scorso anno attraverso uno scandalo sul bilancio e aveva dovuto ritoccare la voce ricavi per circa 5 miliardi di dollari. Le società insieme garantiscono i pagamenti su circa la metà degli 8.000 miliardi di dollari di mutui residenziali in capo alle famiglie americane. Sia l’una che l’altra società sono quotate al New York Stock Exchange e sono autorizzate dal Congresso a immettere liquidità nel mercato della casa. Il loro business consiste nell’acquistare mutui dalle banche e da altri soggetti che prestano denaro: una parte di questi mutui viene acquisita e riportata nei propri libri contabili, mentre un’altra parte viene rivenduta dopo essere stata cartolarizzata. In questo modo Fannie Mae e Freddie Mac si procurano una liquidità che serve a erogare altri mutui. Gli investitori comprano volentieri queste obbligazioni perché è opinione diffusa invano contrastata che in caso d’insolvenza interverrebbe il governo federale.
Su queste due società vigila un ente apposito, denominato Ofheo (Office of Federal Housing Enterprise Oversight), che però, dopo questi scandali comincia a essere messo sotto accusa. In sostanza Ofheo viene accusato di non avere sufficiente potere per svolgere un’effettiva opera di vigilanza.
Ormai i tempi sono maturi perché l’amministrazione Bush, che da tempo guarda con sospetto alla situazione contabile di queste due società, arrivi a una nuova regolamentazione del settore, inclusa la definizione di una nuovo organo di controllo.
Intanto, l’ultima decisione della Sec ha messo in imbarazzo, oltre che il management di Fannie Mae, anche l’auditor Kpmg, già sotto accusa a New York per lo scandalo correlato a pratiche di elusione fiscale.
(a.bon.)


http://www.repubblica.it/supplementi...33kolonna.html

[FaGal]

Fannie's Fans Must Be In Denial

New York Times Full Feed via NewsEdge Corporation : THE Securities and Exchange Commission's smackdown of Fannie Mae should upset not only the company and its arrogant executives. It should also embarrass the Wall Street analysts who reassured investors last September that the S.E.C. would probably take a friendlier view of the company's accounting than did its other regulator, the Office of Federal Housing Enterprise Oversight. Instead, the S.E.C. said last week that Fannie Mae, the giant mortgage company, must restate its earnings for the past four years.

But because shame is simply not in the typical brokerage analyst's DNA, investors were given further assurances that all remained fabulous in the house of Fannie. According to one of the shills, removing $9 billion in earnings from Fannie Mae's results since 2001 (Fannie's own estimate, by the way) would have no economic significance.

Of course, these are the same people who have never met a corporate management team they didn't like. And the steady stream of bounteous investment banking fees Fannie Mae provides to Wall Street probably doesn't hurt, either. In any case, the analysts' utterances had the desired effect: Fannie's stock fell only 0.5 percent by the end of the week.

A few analysts are not under Fannie Mae's spell, however, and they take a different view. One such skeptic, Josh Rosner, an analyst at Medley Global Advisors in New York, said that while the company's regulatory woes were the immediate problem, other forces out of Fannie's control would put significant pressure on its business of buying and selling billions of dollars in mortgages.

And on the subject of Fannie Mae, Mr. Rosner is worth heeding. For a year, he has been warning clients about coming Fannie Mae woes; his has been a lonely voice of reason on the company's prospects.

Mr. Rosner said that even after Fannie Mae works out its differences with legislators who want to rein it in and with regulators who want more conservative accounting, its troubles are far from over. That's because the mortgage market is changing, and those shifts are sure to lessen the company's dominance and, more important, cut into its income growth.

We're not in Kansas anymore, Mr. Rosner said.

In making his case for why the landscape around Fannie Mae is forever changed, Mr. Rosner pointed to three major shifts. First is the fact that the 30-year fixed rate mortgage, the highly profitable loan that is Fannie Mae's stock in trade, appears to be losing some appeal among homeowners.

About 30 percent of the mortgage market is adjustable-rate mortgages. But so-called hybrid adjustables, which have a fixed rate of interest for a specified period and then move to a floating rate, are coming on strong. These hybrids make up almost three-quarters of the adjustable-rate mortgage market, up from 7 percent five years ago, Mr. Rosner said.

Consumers will be more likely to choose hybrid adjustable-rate mortgages in the future, Mr. Rosner reckoned, and not only because they are cheaper than 30-year fixed-rate loans. Increased family mobility has shortened the typical mortgage to five to nine years. So homeowners will figure that hybrid mortgages with fixed rates for 7 or 10 years are preferable. The only factor that could alter this trend would be a significant increase in interest rates.

Fannie Mae, of course, could compete in the adjustable-rate mortgage arena. But, Mr. Rosner noted, it would have a negative effect on the company's profit margins.

A second element that could undermine Fannie's business in coming years relates to new capital requirements expected in 2006 from the Bank for International Settlements. As Mr. Rosner explained, one of Fannie Mae's main roles is as a conduit for lenders seeking to free up both the capital to make additional loans and the reserves that must be held against those loans.

Lenders like to sell their loans to Fannie Mae because they can lend that money again, generating additional revenue. The banks can also swap loans for guarantees from Fannie Mae so that they have no exposure to the mortgages and do not have to add to reserves.

UNDER the new rules, capital requirements will move away from the one-size-fits-all attitude toward risk assessment. Now, all loans in an asset class have the same capital requirements. In the future, banks will be allowed to adjust their capital to reflect the risks in a particular loan. This change, Mr. Rosner said, will significantly increase the economic incentives for banks to hold onto mortgages, especially those with the most predictable credit and cash-flow characteristics. But it will also cut into Fannie Mae's growth.

Another worry is the prospect for a decline in the fees that Fannie Mae earns from banks for guaranteeing loans, a big source of its income.

Mr. Rosner said that if Congress created a new regulator to oversee Fannie Mae and its mortgage finance sibling, Freddie Mac, that new entity would also likely supervise the Federal Home Loan Banks, which compete with Fannie and Freddie. Such a regulator would probably bring into line disparate practices at the entities; one of these relates to the size of guarantee fees they charge their customers.

Fannie Mae charges guarantee fees that are roughly double those assessed by the home loan banks. Mr. Rosner said that this could soon change, further pressuring Fannie Mae's profit margins. Fannie Mae reaped $1.5 billion in such fees last year.

Mr. Rosner concedes that these may be longer-term concerns. More immediately, he fears a possible wave of mortgage defaults. After all, mortgage defaults typically occur from three to five years after the loans are written. The flood of refinancing in recent years means that a great majority of outstanding mortgage loans are less than three years old. Defaults could rise substantially.

A Fannie Mae spokeswoman said that the company would not comment, beyond its avowal to do what it must to comply with the S.E.C.'s findings on its accounting deficiencies.

Why Fannie Mae shareholders are so unfazed by the company's mounting problems is a mystery. Sean Egan, president of Egan-Jones, an independent debt-rating firm that does not receive payments from companies it analyzes, said he was surprised by the denial at work among Fannie Mae's investors and debt holders.

All big failures are built on false assumptions, he said. The tulips were always going to be in short supply, so prices were always going to go up. In the case of Fannie Mae and Freddie Mac, they have terrific assets -- mortgages that have historically been a low-default asset. And the federal government is going to stand behind them.

What if one or both assumptions are false? If Fannie Mae gets into difficulty, Mr. Egan said, It's highly likely that current investors are not going to get paid back in full and on time by the federal government.

Ridiculous? Maybe not.

Photo: Franklin D. Raines, Fannie Mae's chief executive, testifying to a House panel in October. Fannie Mae, the mortgage giant, is facing legislators' and regulators' scrutiny. (Photo by Linda Spillers for The New York Times)(pg. 4) Graph tracks the daily closing share price of Fannie Mae for 2004. (Source by Bloomberg Financial Markets)(pg. 1)

December 19, 2004, Sunday Late Edition - Final Section: SECT3 Page: 1 Column: 01 Desk: SundayBusiness Length: 1269 words

<<New York Times Full Feed -- 12/19/04, p. 1>>

[FaGal]

The Latest in a String of Setbacks for KPMG

New York Times Full Feed via NewsEdge Corporation : The Securities and Exchange Commission's announcement on Wednesday night that Fannie Mae had violated accounting rules was the latest blow to the company, whose top executives had long maintained that its methods were in compliance.

But the announcement was also an embarrassment for the company's independent auditor, KPMG, which had raised questions about Fannie Mae's practices but continued to sign off on the company's statements.

The S.E.C.'s chief accountant found that Fannie Mae's accounting practices did not comply with two requirements for recording gains and losses on derivatives contracts, which the company used to hedge against the risk of interest rate swings.

While Fannie Mae said that it would comply with the S.E.C.'s decision, which could wipe out as much as $9 billion when it restates its earnings, the company's executives had previously argued that the accounting rules had room for a different interpretation and often consulted with KPMG when there was a concern about compliance.

KPMG, which had previously stood by Fannie's financial results, said in a statement yesterday that it accepted the company's decision to follow the S.E.C.'s directions with respect to prior financial reports. The firm also said that it accepted the S.E.C.'s findings on a complex derivatives accounting rule, known as FAS 133, as the final arbiter of GAAP.

''It should have a jarring effect on KPMG, but the quiet undertone shared by all of the Big Four accounting firms is, 'this too shall pass,' said Allan D. Koltin, president of PDI Global Inc., a Chicago-based consultancy that works with many large accounting firms.

The decision on Fannie Mae is the latest setback for the accounting firm. In recent years, KPMG has been at the center of several high-profile financial scandals and has settled a number of lawsuits without admitting wrongdoing.

In October, KPMG agreed to pay $10 million to settle S.E.C. charges that the firm and four of its accountants did not properly audit the financial statements of Gemstar-TV Guide International.

Earlier that month, KPMG's American and Belgian business units agreed to pay $115 million to settle shareholder claims of accounting malpractice that arose from the collapse of Lernout & Hauspie Speech Products, a Belgian speech-recognition software company.

Last year, KPMG paid more than $200 million to settle lawsuits stemming from its audits of Rite Aid and Oxford Health Plans.

The firm is also under investigation by a federal grand jury in Manhattan looking into the sale of tax shelters. And it remains entangled with the S.E.C. over Xerox, whose books it audited while executives there committed securities fraud.

But the firm's swift action to dismiss partners and clean up practices in other cases has allowed it to survive, accounting analysts said. While the KPMG name may now be more frequently in the news, they said, its practices were in line with the rest of the industry during the late 1990's.

If you look at all the instances of negative publicity and lawsuits, all of them are occurring for pre-Enron activity, said Arthur W. Bowman, the editor of an accounting industry newsletter. Today, KPMG would probably stand up and tell Fannie Mae you can't do that.

December 17, 2004, Friday Late Edition - Final Section: SECTC Page: 4 Column: 04 Desk: Business/Financial Desk Length: 580 words

<<New York Times Full Feed -- 12/17/04, p. 4>>

[FaGal]

December 22, 2004
Chief Is Ousted at Fannie Mae Under Pressure
By STEPHEN LABATON

WASHINGTON, Dec. 21 - Under heavy pressure from regulators, Fannie Mae, the mortgage finance giant, forced out its chairman and chief executive, Franklin D. Raines, late Tuesday, days after the company was found to have violated accounting rules.

The ouster of Mr. Raines, who turns 56 next month, may mean the end of an extraordinary political and business career. Mr. Raines, a high-ranking official in the administration of President Bill Clinton and a prominent Democrat, had traveled from a family that was once on welfare to the pinnacle of government, academia and business.

In many respects, he was the ideal leader of Fannie Mae when he took the helm six years ago. He represented its public mission, its financial savvy and its political influence. But the polished politician was outmaneuvered by Fannie Mae's regulator, the Office of Federal Housing Enterprise Oversight, a once-obscure agency. Ultimately, he became a casualty of his own vigorous defense of aggressive accounting practices at the company.

The agency, known as Ofheo, had in recent days demanded significant changes in the senior management and declared that Fannie Mae had significantly failed to meet its capital requirements - the cushion of money required to cover losses - people involved in discussions between the regulator and the company's board said. The move gave the regulators at the agency the authority to begin taking steps to remove the senior executives.

Ofheo decided to use its most powerful regulatory weapon after officials saw reports that members of the Fannie Mae board were continuing to support Mr. Raines even after the Securities and Exchange Commission had found that the company violated accounting rules.

Fannie Mae will now embark on a search for a successor to Mr. Raines. In the meantime, it announced that the acting chairman would be Stephen B. Ashley, a 10-year member of its board and a real estate executive from Rochester. Daniel H. Mudd, currently vice chairman and chief operating officer, was named acting chief executive. In taking its actions, the regulators also insisted on splitting the chairman's and chief executive's posts. [Page C1.]

The regulators' decision also means that Fannie Mae will have to restate its earnings for the last three and a half years, and that may force it to declare $9 billion in losses, wiping out more than a third of its earnings over the period.

Nevertheless, some of Fannie's directors had been persuaded by Mr. Raines's argument that the company's auditor, KPMG, approved its interpretation of the accounting rules and that the S.E.C. had not found that its senior management did anything improper.

Until it came under pressure from Ofheo, a divided board of Fannie Mae stood behind Mr. Raines.

After the board shifted course on Tuesday and abandoned Mr. Raines, the regulator issued a brief statement declaring that the board was committed to solving the company's problems.

"We are encouraged," the statement by Armando Falcon Jr., director of Ofheo, said, that "the board's announcement signals a new culture and a new direction for Fannie Mae."

Mr. Falcon said the company had in fact exceeded one of its capital requirements, known as risk-based capital, by $20 billion. But he said that a second measure, known as minimum capital, was short by almost $3 billion as a result of the order by the commission that the company restate its earnings. The company is required to meet both standards to be classified as financially healthy.

He also said his agency was "working closely with the board to promptly address the elements of a capital restoration plan and other important reforms."

Mr. Raines, breaking a weeklong public silence, issued a statement on Tuesday saying: "I previously stated that I would hold myself accountable if the S.E.C. determined that significant mistakes were made in the company's accounting. Although, to my knowledge, the company has always made good-faith efforts to get its accounting right, the S.E.C. has determined that mistakes were made. By my early retirement, I have held myself accountable."

On Tuesday, Fannie Mae also announced the departure of its chief financial officer, J. Timothy Howard, and its auditor, KPMG. The interim finance chief will be Robert Levin, another executive at the company.

Fannie Mae, the largest nonbanking financial institution in the world, plays a pivotal role in the nation's housing markets. It was established by Congress and President Franklin D. Roosevelt during the Depression and was a unit of the federal government until 1968, when it became a publicly traded company on the New York Stock Exchange.

Despite the change in its status, it enjoys a number of special benefits that have angered its rivals - including a credit line with the Treasury for as much as $2.25 billion, a lower capital standard than comparable institutions, and a widely held perception that it would be bailed out by the government. That view has made it significantly less expensive for the company to borrow money.

In recent years, some industry and government critics, including Alan Greenspan, the chairman of the Federal Reserve, have sought to have Fannie Mae's privileges removed. They say the company could pose a significant risk to taxpayers if it became troubled. And the White House, concerned about any political fallout if Fannie were to stumble, has declined to make 5 appointments to the 18-member board.

Until recently, Fannie successfully beat back the efforts to dilute its power by promoting its housing function. But it is now expected to face a reinvigorated effort in Congress to limit its growth.

Fannie Mae does not itself issue mortgage loans. But it serves as a bridge between lenders on Main Street and enormous pools of capital on Wall Street. By buying mortgages up to a certain dollar level - currently $333,700 - from banks and savings institutions, and either holding them as an investment or selling them in the secondary markets as mortgage-backed securities, it has made home financing widely available.

In the process, it has built a steadily profitable business for shareholders and enriched its top executives. Together with a smaller brother company, Freddie Mac, it holds or guarantees more than $7 trillion in mortgages.

The announcement on Tuesday was a remarkable vindication for Ofheo and Mr. Falcon. The regulatory agency had long been viewed as captive to Fannie Mae and Freddie Mac, the two large government- sponsored enterprises that it regulates. In recent years, Fannie Mae in particular waged a quiet war against Ofheo in Congress, seeking to reduce its power and cut its budget.

As recently as two months ago, Mr. Falcon had come under attack in Congress. At a hearing in October to explore his agency's conclusions about Fannie Mae, he faced hostile questioning by lawmakers, some of whom had been given questions by Fannie Mae. Representative William Lacy Clay, Democrat of Missouri, accused Mr. Falcon of leading a "political lynching" and a "witch hunt."

But Ofheo, which initially stumbled in its examination of Freddie Mac last year, adopted a more aggressive posture. It ultimately forced a management change at Freddie Mac last year and is now doing so with Fannie Mae.

The regulatory agency precipitated the crisis at Fannie in September, when it issued a report concluding that company executives manipulated expenses to smooth earnings and meet projected financial targets - which would enable the executives to win maximum bonuses.

In a letter on Sept. 20, Mr. Falcon told Fannie Mae directors his agency had found significant evidence that raised "doubts concerning the validity of previously reported financial results, the adequacy of regulatory capital, the quality of management supervision, and the overall safety and soundness of the enterprise."

Mr. Raines has denied that the expenses were manipulated for such purposes; the Securities and Exchange Commission and the Justice Department have been looking into those matters. He also suggested to Congress in testimony two months ago that Ofheo had in fact embarked on a witch hunt and had improperly prepared and issued its report. And he predicted that he and Fannie Mae would be vindicated by the S.E.C.

But his counterattack, which eased some pressure on the company and its senior management for a few weeks, was effectively halted last Wednesday, when the chief accountant of the S.E.C. concluded that the company had violated accounting rules on its treatment of prepaid mortgages and financial derivatives. He ordered Fannie Mae to restate its earnings for the last three and a half years, a move that will put the company significantly under its minimum capital requirements.

The conclusions by Ofheo put Fannie Mae under increasing pressure in Congress. The company had long been regarded as a powerful force by members of the House and the Senate. But in recent days, its support has eroded and it became clear to some of its directors that its wounded management, and particularly one led by a former top Democrat, would face growing difficulties.

Republican lawmakers, as well as the Bush administration, have proposed a variety of changes in the oversight of the company, as well as trying to limit it from expanding into new businesses. Still, this year, Fannie Mae succeeded in thwarting an attempt to tighten regulatory oversight.

For Mr. Raines, Fannie Mae seems to be the last chapter in a storied career. His résumé includes stints as President Clinton's director of management and budget, and as president of the board of overseers of Harvard University.

One of seven children of a janitor and a cleaning woman in Seattle, Mr. Raines did well enough in school to get into Harvard College and then receive a Rhodes Scholarship to study at Oxford University. Then he returned to Harvard for a law degree.

His first stint at Fannie Mae was in the 1990's, as a vice chairman, after he had worked as a banker at Lazard, the investment bank. He left the Clinton administration in 1998, a year after he played a central role in negotiating a landmark budget agreement with Congressional leaders, and he became the head of Fannie Mae in 1999.

Since Fannie Mae's crisis erupted in September, a growing chorus of lawmakers has demanded that Mr. Raines return any compensation he received that was based on the company's financial performance - which is in the process of being restated.

Over the last three years, he has made $14 million in salary and bonuses and taken home $25.6 million in incentive pay. As of the end of last year, he held options on 1.9 million shares of Fannie Mae stock, valued at almost $12 million. Fannie Mae also paid almost $200,000 for Mr. Raines's use of company transportation in 2003. It is impossible to determine how many of his stock options can be exercised at current prices.

The company's share price was $75.06 at the end of last year. It closed on Tuesday at $70.35.