Fannie Mae's "misapplication" and "disregard" for derivative accounting rules (FAS 133) "raise serious doubts" about the validity of the mortgage company's financial statements for 2001, 2002, and 2003, according to a report by the Office of Federal House Enterprise Oversight.In its efforts to reduce earnings volatility, Fannie classified 99% of its $1.04 trillion derivative portfolio as "perfectly effective" hedges so that changes in the value of the derivatives would not be reflected in earnings. OFHEO believes a large number of the derivative transactions do not qualify as hedge accounting and could have a "significant impact on Fannie Mae's reported financial results, both prospectively and historically," the report says. The regulator does not put a price tag on the amount of losses or gains the government-sponsored enterprise might have incurred on its derivative portfolio over the past three years. However, OFHEO is questioning the validity of $12.2 billion in deferred losses relating to cash flow hedges, which the regulator maintains did not qualify for hedge accounting. "In order to determine the actual impact of the matters discussed within, a substantial investment of resources and management's commitment will be required," the OFHEO report says.

Subscribe Now

Authoritative analysis and perspective for every segment of the mortgage industry

30-Day Free Trial

Authoritative analysis and perspective for every segment of the mortgage industry