Fannie Improperly Accounts for Securities, Ofheo Says

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May 6 (Bloomberg) -- Fannie Mae, the largest buyer of U.S. mortgages, improperly accounted for some bonds backed by manufactured housing and aircraft leases, and must further write down the value of the investments, its federal regulator said.

``The current accounting of Fannie Mae does not reflect the earnings volatility associated with these assets, does not best reflect actual economic performance and does not recognize on a timely basis impairments of the portfolio,'' Armando Falcon, the director of the Office of Federal Housing Enterprise Oversight, said in a letter to Fannie Mae Chief Executive Franklin Raines.

The regulator's effort to uphold what it called ``the proper accounting standard'' follows an acknowledgement by Freddie Mac six months ago that it understated earnings by $5 billion from 2000 until 2002. The company, Fannie Mae's smaller rival, sought to reduce earnings volatility, according to a December report by the regulator, known as Ofheo.

``This is another case where in the eyes of Ofheo there was misinterpretation of accounting rules,'' said Hilary Hayes, an analyst at Victory SBSF Capital Management, which last quarter sold its 950,000 shares of Fannie Mae. ``The next question is: what is the magnitude of the correction?''

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