updated 3/13/2006 5:51:28 PM ET 2006-03-13T22:51:28

As it continues to peel through the onion-like layers of its $11 billion faulty accounting, mortgage company Fannie Mae disclosed Monday that it has found additional errors in its government-ordered review.

The government-sponsored company, which finances one of every five home loans in the United States, said it had made “substantial progress” toward completing its accounting review but will miss a regulatory deadline for filing its annual financial report for the second straight year.

Top company executives sought to assure investors that all focus and energy was not being engulfed by the massive reworking of Fannie Mae’s books and that new avenues of business were being pursued in an increasingly competitive U.S. mortgage market. Some high-level executives have been “walled off” from the work of the accounting review, they said.

“There’s huge demand out there,” President and CEO Daniel Mudd said in a conference call with analysts. “... (We) feel good about the position that we occupy.”

As the record housing market of recent years shows signs of cooling, Mudd said the company expects home sales to decline about 8 percent this year from last.

Fannie Mae also said that it expects an upcoming internal report to show that the company’s financial controls remained insufficient as recently as the end of last year.

Federal regulators in 2004 accused Fannie Mae of serious accounting problems and earnings manipulation to meet Wall Street targets, and the SEC ordered the company to restate earnings back to 2001 — a correction expected to reach an estimated $11 billion. The Justice Department is pursuing a criminal investigation.

Fannie Mae, which is the second-largest U.S. financial institution after Citigroup, does not expect to complete the massive reworking until the latter half of this year. The company said in its SEC filing Monday that it has completed “the process of identifying accounting issues for review.”

“We’ve made substantial progress in our accounting review,” said Mudd, who took the helm of Fannie Mae after the accounting scandal swept out then-CEO Franklin Raines and Chief Financial Officer Timothy Howard in December 2004.

“It’s not as fast as I want” but is moving at the disciplined pace required, Mudd added.

While it struggles to untangle its accounting, Fannie Mae’s share of the multitrillion-dollar home mortgage market has eroded amid heated competition from big banks and mortgage loan companies. The company reported Monday that its portion of the market for home loans that are bundled into securities and sold to investors dropped to around 24 percent last year from 29 percent in 2004 and 45 percent in 2003.

Fannie Mae said the newly disclosed accounting errors are in areas including certain loans, investment securities, guaranty fees charged to banks and other mortgage lenders, houses acquired through foreclosures, interest on delinquent home loans, and reverse mortgages. The company did not provide an estimate of the amounts of the errors.

Similarly, Fannie Mae in November disclosed new accounting problems that had been uncovered in several areas, including recording losses on mortgages and the mortgage-backed securities it guarantees as well as expenses for financing some real estate investments and accounting for low-income housing tax credits and mortgage insurance.

They all are in addition to the accounting-rule violations that came to light in September 2004 involving derivatives, the financial instruments Fannie Mae uses to hedge against swings in interest rates, and its mortgage commitments.

A company-ordered report released last month detailed a breakdown in financial controls and found an arrogant corporate culture at Washington-based Fannie Mae. The report, which followed a 17-month investigation by a team led by former Sen. Warren Rudman, said that Fannie Mae’s former finance chief and controller share primary responsibility for the stunning accounting failures.

The Bush administration has asked Congress to give the government a tighter hand over Fannie Mae and its smaller rival, Freddie Mac, and to mandate a reduction of their massive mortgage portfolios.

Fannie Mae and Freddie Mac were created by Congress to pump money into the $8 trillion home-mortgage market to keep interest rates low. They buy and guarantee repayment of billions of dollars of home loans each year from banks and other lenders, then bunch them together into securities that are resold to investors worldwide.

Freddie Mac, which had its own accounting scandal in 2003, said Friday that it will report its financial results for 2005 in May rather than March, as previously planned, because it needs more time to institute a new method of valuing some assets.

Shares of Fannie Mae dropped 96 cents to close at $52.97 Monday on the New York Stock Exchange.

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