Federal regulators' investigation of Fannie Mae's accounting has taken a new avenue as they examine whether the mortgage giant failed to properly account for thousands of trusts it created whose assets are kept off its balance sheet.
Fannie Mae shares dropped $1.78 to $51.46 in Monday trading on the New York Stock Exchange -- below their previous 52-week closing low of $53.20.
Fannie Mae uses the trusts to issue securities backed by the billions of dollars of home mortgages annually that it buys from lenders and bundles together for resale to investors worldwide.
The government-sponsored company, which is the largest U.S. buyer and guarantor of home mortgages, recently was ordered by the Securities and Exchange Commission to restate its earnings back to 2001, a correction that could reach an estimated $11 billion.
Another federal agency, the Office of Federal Housing Enterprise Oversight, also has been investigating Fannie Mae's accounting since last year and found that the company violated rules related to derivatives, financial instruments that it uses to hedge against swings in interest rates.
The oversight office has given Fannie Mae until Sept. 30 to boost its capital cushion against risk by 30%, or about $5 billion.
Last month, Fannie Mae disclosed that it would miss Thursday's SEC deadline for filing its financial report for 2004 and might have to record an additional loss of about $2.4 billion. In addition, the discovery of falsified signatures raised the possibility of criminal activity by company employees.
Now comes the disclosure that the oversight office also is scrutinizing the company's accounting for the trusts.
"This is one issue of many that we are looking at in our special examination of Fannie Mae," the office's spokeswoman Stefanie Mullin said Monday.
Armando Falcon, the oversight office's director, told the Wall Street Journal that the agency was trying to determine the extent of a possible accounting problem with the trusts, the newspaper reported Monday.
Fannie Mae spokeswoman Janis Smith declined to comment.
Fannie Mae collects fees from the banks and other lenders that sell it mortgages for guaranteeing loan payments in the event of default by homeowners. The assets and liabilities of the trusts issuing the mortgage-backed securities are not recorded on Fannie Mae's balance sheet because it has deemed them to be so-called qualifying special purpose entities under its interpretation of accounting rules.
Also Monday, the oversight office submitted for publication in the Federal Register a corporate governance rule that it said toughens the current regulations "and reduces the potential for future corporate misconduct at Fannie Mae and Freddie Mac," the No. 2 player in the $8-trillion home-mortgage market, which also is government sponsored.