Fannie Mae has estimated that it faces a possible $9 billion loss if the SEC rules that its treatment of derivatives violates accounting rules and hides the enterprise's hedging losses over the past three years, as alleged by its primary supervisor -- the Office of Federal Housing Enterprise Oversight.The giant mortgage company also disclosed in a special 12b-25 filing with the Securities and Exchange Commission that its auditor could not sign off on its third-quarter financial statement (Form 10-Q) because of the accounting dispute with OFHEO, which is now before the SEC's chief accountant. In light of these circumstances, Fannie Mae said it is "not able to file a timely Form 10-Q," and therefore has missed the Nov. 15 deadline for filing an audited financial statement. In a press release that explains the 12b-25 filing, the mortgage giant stresses that it has properly accounted for its derivative hedging activities. However, it may be required to record an after-tax loss of $9 billion if the SEC finds that Fannie did not qualify for hedge accounting for all periods since Jan. 1, 2001. "Fannie Mae will modify its accounting, if necessary, to comply with SEC's views," the press release says. The release also reveals that Fannie's third-quarter earnings (based on the company's current interpretation of generally accepted accounting principles) fell 9%, to $2.42 billion, compared with $2.67 billion in the same period last year. Under a core-earnings calculation devised by Fannie, the company said third-quarter earnings increased by 1%, to $1.85 billion, from $1.83 billion in the third quarter of 2003.

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