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Fannie Mae to boost reserve cushion

Mortgage giant might have to slow its growth

WASHINGTON -- Under pressure from federal regulators, mortgage giant Fannie Mae has agreed to boost its reserve cushion against risk by several billion dollars and take other sweeping actions to correct what were cited as serious accounting problems, including recalculating key transactions and tightening internal controls.

Some observers said yesterday that the mandate to increase its reserve capital by mid-2005 means that the biggest financer of home mortgages in the country may have to slow its growth or shrink in size.

The government-chartered mortgage financer and its regulator said yesterday they had reached an agreement after negotiations that stretched 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 in one case to meet target levels for the award of executive bonuses -- and other serious accounting misdeeds, and it ordered "immediate remedial action."

In a statement, the director of the oversight office, Armando Falcon, called the agreement reached late Sunday with the board "an important step toward resolving these concerns and helping to assure safe and sound operations" at Fannie Mae.

The new capital requirement "theoretically could make mortgages more expensive," said Keith Gumbinger, a vice president at HSH Associates, a publisher of mortgage information based in Pompton Plains, N.J.

"Those funds to build reserves have to come from someplace, most likely profits on products they sell," he said. "So rather than seeing pass-through increases [in interest rates] to the consumer, it's likely their profitability will be trimmed over the next period."

Still, analysts at credit-rating agency Standard & Poor's, which last week said it was considering downgrading some of Fannie Mae's debt, said yesterday they were "encouraged" by the speed with which the company and the US agency had reached accord.

A Treasury official, meanwhile, renewed the Bush administration's call for tighter government reins over Fannie Mae and Freddie Mac, the other huge government-sponsored mortgage company, which faced an accounting crisis 15 months ago.

Already last week, the Washington-based company said it had revised its employment contracts with the three top executives, including chairman and chief executive Franklin Raines, to ensure that if they were fired, they would not get huge severance payouts.

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