Fannie Remains Interested in Lower Credit Grade Customers

Fannie Mae executives are upbeat about completing a restatement by the end of this year and they are looking forward to entering the subprime market to "remain relevant to their customers."

Fannie president and chief executive Daniel Mudd assured investors and analysts last week that the restatement of the 2001, 2002, 2003 and 2004 financial results will be issued by the end of the year.

"We believe that we have now identified all of the accounting issues that will require restatement," Mr. Mudd said during a conference call. Fannie accountants are running the numbers and actually starting the auditing process, he said.

The publicly traded company also disclosed in a securities filing that the price tag for its accounting scandal should be lower than its original $10.8 billion loss estimate.

The government-sponsored enterprise originally estimated its misapplication of derivative accounting is going to cost $8.4 billion. And it expected an additional $2.4 billion loss related to mortgage commitments.

But the accountants discovered offsetting gains in pricing the mortgage commitments, which should reduce some of the loss - although they have not determined the amount yet.

"We believe the net effect of restating the mortgage commitments will be significantly less than the $2.4 billion we previously disclosed," Mr. Mudd said.

The mortgage giant also disclosed last week that the $400 million settlement it paid to securities regulators for alleged "fraudulent" financial reporting is not tax deductible. The expense will be taken against 2004 earnings.

During the conference call with investors and analysts, CEO Mudd talked about purchasing mortgage products along a broader range of the "credit spectrum," which appears to be a way of saying he wants Fannie to become more active in the subprime or nonprime market.

"We have stood back through this cycle from some segments of the market unless we were really comfortable with the originators and the servicers. We now see some opportunities where spreads are opening up a bit and we want to remain relevant to those customers," Mr. Mudd said.

Fannie executive vice president Thomas Lund noted that the real estate market is changing and there is a new appreciation of credit and regulatory risk in the pricing of loans. Lenders also are rethinking their lending practices to match the "right borrowers to the right loans," he said.

The CEO assured the audience that Fannie will proceed cautiously. "As we enter those markets, we will typically go in with more third-party enhancement," Mr. Mudd said. "We also like to partner with seller/servicers that we have a good, strong relationship with."

Fannie executives did not provide guidance on when the 2005 financial results will be completed and released. Although they acknowledged that Fannie will have to disclose material weaknesses in its internal controls as part of the 2005 earnings report.

Executives also said they are fairly confident the company will not find any problems relating to the back-dating of stock options. However, they are double-checking to make sure. (c) 2006 Mortgage Servicing News and SourceMedia, Inc. All Rights Reserved. http://www.mortgageservicingnews.com http://www.sourcemedia.com

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