Magazine article American Banker

Fannie Uncovers More Errors, Sees an $800M Hit

Magazine article American Banker

Fannie Uncovers More Errors, Sees an $800M Hit

Article excerpt

Fannie Mae said Tuesday that it had discovered more errors in its past accounting and that its ongoing restatement of results will cost it $800 million this year.

One of the new adjustments the government-sponsored enterprise said it must make involves about $28.5 billion of assets it had incorrectly moved into special-purpose securitization-related entities. Those assets will go back to Fannie's balance sheet, and that in turn will increase the amount of capital Fannie has to carry on its books.

The transfer of assets to its balance sheet requires that Fannie have capital support of $926 million, but as of Dec. 31 it said it had exceeded its minimum capital requirement as set by the Office of Federal Housing Enterprise Oversight by 34%.

Fannie also said it had to reclassify a "pro rata portion" of its recorded guaranty-fee income as interest income.

Analysts downplayed the significance of the accounting adjustments, and Fannie's stock gained 1.3% to $51.52 after release of the news. "None of them were a big deal; it's small potatoes," said Edwin Groshans, of Fox-Pitt, Kelton. "They already have a balance sheet of $721 billion, so adding $28.5 billion is not a big deal."

Also helping Fannie's stock price was an upgrade from one of the more pessimistic analysts on the company and news that it received permission from its board and OFHEO to buy back $100 million of shares from nonexecutive employees.

Moshe Orenbuch, an analyst with Credit Suisse First Boston, said the buyback permission was noteworthy. Had OFHEO been concerned about Fannie's capital, it would not have allowed the buyback, he said.

Banc of America Securities analyst Robert Lacoursiere upgraded Fannie's stock to "neutral" from "sell." Mr. Lacoursiere wrote Tuesday that "recent price declines have resulted in a valuation that now implies just a 1.8% potential upside including dividends. …

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