Fresh Violations Found at Fannie Mae
This article is from the archive of The New York Sun before the launch of its new website in 2022. The Sun has neither altered nor updated such articles but will seek to correct any errors, mis-categorizations or other problems introduced during transfer.

Shares of Fannie Mae, the largest source of money for American home loans, tumbled the most since the stock market crash of 1987 after Dow Jones said investigators found “new and pervasive accounting violations.”
The stock dropped $4.99, or 11%, to $41.71 on the New York Stock Exchange. The shares are the lowest since July 1997, and are down 41% this year after its regulator in 2004 uncovered accounting mistakes since 2001. Today’s decline wiped out about $4.82 billion in market value.
Fannie Mae may have bought so-called finite insurance policies to hide earnings losses after they were incurred, according to Dow Jones, citing people “close to, or who have been involved” in the investigation it didn’t identify.
Executives at the company also embellished earnings by overvaluing assets, underreporting credit losses, and misusing tax credits, according to Dow Jones. “If Fannie Mae is using finite insurance to offload losses, that would generate a significant amount of concern in the investor community,” an analyst at Fox-Pitt, Edwin Groshans, said.
Fannie Mae officials declined to comment on specific accounting issues, Dow Jones said. A Fannie Mae spokeswoman, Janis Smith, didn’t immediately return a phone call for comment.
A spokeswoman for the Office of Federal Housing Enterprise Oversight, Corinne Russell, declined to comment. Ofheo is the regulator for Fannie Mae and the smaller Freddie Mac.
Fannie Mae was created by the government in 1938 to provide financing for home mortgages. They own or guarantee almost half the $7.6 trillion mortgage market. The company and Freddie Mac make most of their profit on the difference between its costs to borrow in the bond market and the returns on mortgages held in their portfolios. They also earn money by charging lenders a fee for guaranteeing credit on mortgage-backed bonds. The extra yield investors demand to own 10-year Fannie Mae debt rather than Treasuries was little changed at 33.5 basis points.
A former U.S. senator, Warren Rudman, who is heading the probe, said earlier this month that investigators plan to complete by year-end a report into an estimated $10.8 billion in accounting errors. “At this moment in time we don’t have any conclusions on these points,” Mr. Rudman said yesterday. Fannie Mae’s directors in September 2004 hired Mr. Rudman, a Republican from New Hampshire, to lead an investigation after the company’s regulator determined Fannie Mae used improper “cookie jar” reserves and broke accounting rules when using financial contracts to reduce risk.