Fannie Finds More Errors

Fannie Mae, which is working through a $10.8 billion earnings restatement scandal, has found yet more accounting errors and will have to move $28.5 billion in assets to its balance sheet.

A company spokeswoman told Mortgage Servicing News that the government-sponsored enterprise cannot, at this time, determine whether moving these off-balance-sheet assets (Fannie MBS) to its on-balance-sheet portfolio will result in an additional loss or gain.

During a conference call with investors, Fannie CEO Daniel Mudd reiterated the company's commitment to cleaning up its accounting woes, but refused to rule out the possibility that more problems could come to light.

The GSE is in the process of restating its earnings for 2001 through 2004 and has yet to release any profits for 2005 and the first quarter of this year.

It expects to release the revised 2001 through 2004 earnings after June 30 of this year. The restatement is expected to result in a cumulative loss of $10.8 billion.

The information about the $28.5 billion was contained in a new 12b-25 filing with the Securities and Exchange Commission. The filing also reveals that over the past year Fannie has dumped $126 billion of its own MBS on the market.

From March 31, 2005 to March 31, 2006, its holdings of its own MBS has fallen by a stunning 27%. The filing also notes the GSE is still in danger of being de-listed by the New York Stock Exchange, though few in the industry believe it will actually happen.

Mr. Mudd stressed to analysts on the conference call that it was more important to get the restatement done right than to finish it quickly. Fannie Mae, he said, is making "significant progress on the remediation" of its accounting problems and seemed to suggest that the end is near.

"At this point we are substantially complete in the resolution of accounting problems that are relevant to the restatement," Mr. Mudd said.

Once the restatement is completed, he said Fannie Mae "expects to be in a position to return more capital to shareholders."

In terms of the economic environment, Fannie Mae officials said the accounting overhaul, while increasing operating costs, has not diminished Fannie Mae's ability to grow.

However, Mr. Mudd warned that the housing market "has cooled noticeably." Fannie Mae expects to see the number of home sales drop 7% to 10% this year, but Mr. Mudd noted that this would still make 2006 the third busiest year on record in terms of sales.

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