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Fannie Mae defends accounting

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Associated Press / November 17, 2007

WASHINGTON - Three years after a stunning accounting scandal that forced Fannie Mae to restate earnings by $6.3 billion, the government-backed home loan finance company now is on the defensive over a change in how it calculates potential losses from the growing mortgage crisis.

The fear among investors is that a new accounting methodology masks the number of bad loans held by Fannie, thus downplaying potential losses.

Shares of Fannie, the largest US buyer and backer of home mortgages, tanked for the second day yesterday, even as executives tried to pacify skeptical Wall Street analysts in a conference call. The stock fell $2.35 to $40.69, following a 10 percent drop Thursday. In bond markets, the risk premium on Fannie's debt rose.

Fannie first disclosed the new way it has decided to calculate its mortgage losses a week ago, when it submitted several hundred pages of documents to the Securities and Exchange Commission to bring the company's financial reporting up to date for the first time since 2004.

But the bookkeeping change - and its potential impact - received significant attention Thursday in an article published online by Fortune, which is owned by Time Warner.

Using the new method, Fannie reported a so-called annualized credit-loss ratio of 4 basis points for the first nine months of this year, meaning it lost money on four of every 1,000 mortgages it holds on its $2.4 trillion book.

The Fortune article said if the old method were retained, the credit-loss ratio for that period would have been 7.5 basis points - far exceeding Fannie's forecasts.

"This just smacks too much of the accounting games the company was playing a couple years ago," said Armando Falcon, who ran the Office of Federal Housing Enterprise Oversight, which regulates the federal agency regulating government-sponsored Fannie Mae.

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