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Fannie Mae to Hold More Capital

The company agrees to keep billions of dollars more cash on hand while it corrects accounting problems.

September 28, 2004|From Reuters

Beleaguered mortgage finance company Fannie Mae agreed to keep billions of dollars more cash on hand while it corrected accounting problems, its government regulator said Monday.

Fannie Mae must maintain an additional capital cushion equivalent to 30% of the company's current minimum capital requirement, the Office of Federal Housing Enterprise Oversight said in a statement.

The deal comes after an OFHEO report last week that accused the company of pervasive problems with accounting and internal controls and ordered its board to take immediate remedial action.

"The serious concerns raised in OFHEO's report require prompt action," Armando Falcon, director of the oversight office, said Monday. "This agreement is an important step toward resolving those concerns."

Fannie Mae's board and management, faced with last week's 15% drop in the company's share price, expressed commitment to the terms of the accord. The company has also hired an outside law firm to conduct its own review and respond to regulators.

The requirement to hold additional capital may dent the company's profit.

Fannie Mae's minimum capital requirement is 2.5% of assets plus 0.45% of off-balance-sheet obligations, or the equivalent of about $31 billion at the most recent assessment. As of the end of March, the company held almost $36 billion, about $4 billion more than the minimum requirement.

To meet the new requirement, Fannie Mae would have to be holding about $5 billion more. The company has nine months to adapt to the expanded requirement.

Fannie Mae shares, which lost $11 billion in total market value last week, rose 99 cents Monday, or 1.5%, to $66.50 on the New York Stock Exchange.

The company's share price fell below that of its smaller counterpart, Freddie Mac, for the first time in nearly 16 years as investors tried to assess the scope of the accounting scandal.

Freddie Mac shares climbed $2.23, or 3.5%, to $66.82, also on the NYSE.

Credit-rating firm Standard & Poor's said Fannie Mae could generate capital quickly to achieve a bigger capital reserve. The company has "pretty strong" financial flexibility, S&P analysts said.

As part of the agreement, Fannie Mae pledged to change accounting practices to alter the way it accounted for derivatives and amortization of discounts on loans or mortgages it bought.

The accord makes no changes to Fannie Mae management but commits the company to an independent review of staffing, even though OFHEO's investigators said they found clear instances in which management sought to misapply and ignore accounting principles.

Sibling enterprise Freddie Mac agreed to a 30% capital surcharge last year after its own accounting scandal led to a $5-billion upward earnings restatement.

A House of Representatives committee said Monday that it would hold hearings on the accounting irregularities Fannie Mae was accused of using.

"The outrageous conduct outlined in OFHEO's report suggests that for too long Fannie Mae has acted as if it were somehow above the law while arrogantly flouting all responsibility to the Congress, and that must come to an end," said Rep. Richard H. Baker, a Louisiana Republican who heads the panel.

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