Fannie Mae Masking High Losses With Accounting Tweak - Fortune

Shares of government-backed mortgage lender Fannie Mae declined 10% to close at $43.04 Thursday after Fortune reported that the company has changed the way it discloses bad loans in an apparent attempt to conceal higher-than-forecast losses. Contributing to the shares' drop was the release by the Office of Federal Housing Enterprise Oversight [OFHEO] of its 2007 Performance and Accountability Report, which said neither Fannie Mae nor Freddie Mac is fully in compliance with regulatory standards. Plans to ease limitations on the lenders' portfolio growth will not be put into effect until they are fully compliant, the regulator said. Fortune wrote that Fannie Mae has altered the way it calculates its credit loss ratio, which represents bad loans as a percentage of total loans. In August, Fannie Mae forecast a credit loss ratio of 4-6 basis points. In last week's earnings report, the company said it had changed its accounting methodology, resulting in an annualized credit loss ratio of 4 basis points for the first nine months of 2007. If Fannie Mae had made an apples-to-apples comparison, Fortune points out, it would have posted an annualized loss ratio of 7.5 basis points for the period, exceeding the high end of its forecast. Last year, Fannie Mae was penalized for overstating earnings, so the new accounting procedure will likely draw close scrutiny. Fannie Mae controller David Hisey defended the new practice, saying it makes the lender's loss figures "more transparent, not misleading." In related news, Freddie Mac is joining Fannie Mae in setting new fees on the mortgages they buy from lenders. The lender said it is taking the step "in response to continuing volatility and turmoil in the mortgage market, including the deteriorating performance of higher-risk mortgage products." Freddie Mac shares declined 5.3% to $41.86.

Sources: Fortune, MarketWatch, Bloomberg I, II
Commentary: Regulator Irate Over NY AG's Probe of Fannie and Freddie • Fannie, Freddie, WaMu Tumble on Expanded Probe • The Short Case on Fannie Mae • The Moral Hazard of Subprime Risk
Stocks to watch: FNM, FRE. ETFs: RPV, UYG
Earnings call transcripts: Fannie Mae Q4 2006, Freddie Mac Q2 2007

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Comments

[euripides77]

FNM Delinquency Rate Rose to 2.18%

Late last Friday, FNM quietly released its October Summary. It shows that as of September the serious delinquency rate for its "Credit Enhanced" mortgages rose to a year high of 2.18%, the largest month over month increase for the last year. Compare to 2.00% in August, 2007 and 1.74% in September, 2006.

Given the rate of acceleration in delinquencies, one can only wonder how bad the situation was in October and November. These are serious delinquencies and will NOT be bailed out by the conveniently leaked story of an ARM interest freeze. Nothing they do now can reverse the momentum of this financial debacle. Even if they manage to put together a rescue program, which is not a given, it will be too little too late. Just sugar coating for the stock market by some very desperate people wanting to get their money out of FNM, FRE, CFC etc.

You can find the Summary here: www.fanniemae.com/ir/m...