Under pressure from federal regulators, Fannie Mae's board has agreed to take sweeping action to correct what were cited as serious accounting problems, including boosting the mortgage giant's capital, recalculating key transactions back to 2001 and tightening internal controls.
The government-chartered mortgage financer and its regulator said Monday they had reached an agreement after negotiations last week and over the weekend. Last Monday, the Office of Federal Housing Enterprise Oversight told the Fannie Mae board that its eight-month-old investigation had found pervasive earnings manipulation to meet Wall Street expectations and serious accounting misdeeds, and it ordered "immediate remedial action."
"This agreement is an important step toward resolving these concerns and helping to assure safe and sound operations" at Fannie Mae, OFHEO Director Armando Falcon said in a statement Monday.
OFHEO's investigation continues, and Falcon said the issues being looked at include the accountability of Fannie Mae's management. The Securities and Exchange Commission also is investigating the company's accounting. The housing oversight regulators last week raised the possibility of removing top management of Fannie Mae, the biggest financer of home mortgages in the country and the second-largest U.S. financial institution after Citigroup Inc.
The revelations pushed down Fannie Mae's stock more than 13 percent, to a 52-week low, in a three-day slide last week. The shares rose 2 percent, or $1.31, to $66.82 on Monday.
Under the agreement with OFHEO, Fannie Mae will increase, within the next 270 days, its cushion of reserve capital against risk to 30 percent above the current level estimated at some $10 billion. The company also will recalculate all its transactions for derivatives, financial instruments it uses to hedge against interest-rate and other risk, for all quarters going back to 2001.
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