Faulty accounting costs Fannie Mae another $850m

WASHINGTON -- Fannie Mae, the largest U S mortgage finance company, said it will spend $850 million this year to fix accounting errors and complete a $10.8 billion restatement.

The government-chartered company, which in May estimated it would spend $800 million this year revamping its bookkeeping, will also spend more than $200 million preparing financial statements and filing reports to the Securities and Exchange Commission, Fannie Mae said in a regulatory filing yesterday.

The $200 million "is a pretty eye-popping number for six months of regular, ongoing financial statement preparation," said Matthew Park, an analyst at Prudential Equity Group Inc. in New York. The spending disclosed yesterday increases the total cumulative costs from the faulty accounting to $1.62 billion.

Fannie Mae has said the money will be used to pay auditor Deloitte & Touche LLP, law firm Paul, Weiss, Rifkind, Wharton & Garrison, and hundreds of consultants. The costs will continue to have a "substantial impact" on administrative expenses until the company is current in filing with the SEC, Fannie Mae said.

"These are huge numbers," chief executive Daniel Mudd told analysts in a conference call yesterday. "As your CEO I'm obviously anxious and I'm obviously going to drive to have expenses return to a more normalized range."

The SEC and Fannie Mae's regulator on May 23 fined the company $400 million after finding executives from 1998 until mid-2004 used "cookie jar" reserves and deferred expenses to smooth earnings and meet bonus targets.

Fannie Mae owns or guarantees about 20 percent of the $10.5 trillion U S home loan market. It is restating earnings because of errors in how it accounted for mortgage holdings and other derivatives. The Washington-based company plans to complete the restatement by the end of the year.

Fannie Mae, which hasn't filed quarterly financial results since 2004, began revamping its accounting after the Office of Federal Housing Enterprise Oversight that year said former chief executive Franklin Raines and other executives manipulated financial reports. The company lost $30 billion of market value, and Raines and chief financial officer Timothy Howard lost their jobs.

Congress is considering creating a tougher regulator for Fannie Mae and rival Freddie Mac, which in 2003 revealed $5 billion in similar accounting mistakes.

The companies buy mortgages from banks and resell them as bonds with a guarantee, which generates about a third of their profits. They also retain some mortgages and their own mortgage bonds in investment portfolios that now total a combined $1.4 trillion and yield about two-thirds of profit.

Fannie Mae in the third quarter expanded its share of mortgage bond sales to 24.7 percent from 22.9 percent in the prior quarter, the company said. Fannie Mae generates about one-third of its profit by guaranteeing the securities, which are backed by single-family mortgages.

The company also yesterday appointed Rahul Merchant as chief information officer to improve its computer and technology networks. Merchant, who led global business technology at Merrill Lynch & Co., will expand Internet risk management efforts as part of his overall control of company technology, Fannie Mae said .