updated 10/1/2004 8:35:11 AM ET 2004-10-01T12:35:11

Fannie Mae, the giant mortgage company that has been accused of earnings manipulation by regulators, now also has become the subject of a criminal investigation by the Justice Department.

An accounting crisis is swirling at the company, which is the biggest financer of home mortgages in the country, and scrutiny of it is widening across the government.

A federal agency that oversees Fannie Mae and its government-sponsored sibling, Freddie Mac, cited serious accounting problems after eight months of investigating. And the Securities and Exchange Commission is conducting a preliminary inquiry into Fannie Mae’s accounting.

The possibility of deliberate accounting maneuvers designed to bring bigger bonuses to senior executives also was raised by the regulators.

Fannie Mae shares, which fell more than 13 percent last week, declined by $2.85 on Thursday to close at $63.40 on the New York Stock Exchange.

The Justice Department’s investigation was confirmed by a person with knowledge of that probe, first reported in Thursday’s Wall Street Journal. The person spoke on condition of anonymity.

Department spokesman Bryan Sierra declined comment, as did Brian Faith, a spokesman for Washington-based Fannie Mae.

In a report on its investigation of Fannie Mae, the Office of Federal Housing Enterprise Oversight noted an instance in 1998 in which accounting for $200 million in expenses was put off to a future reporting period so executives could receive full bonuses.

“The government could use the bonus plan to help show a motive for overly aggressive accounting,” said Richard Carnell, a law professor at Fordham University. He was an assistant Treasury secretary for financial institutions in the Clinton administration.

Fannie Mae’s board agreed this week to the agency’s demands for revamped accounting and an increased capital cushion against risk.

Regulators said Thursday that the recalculations it ordered may force Fannie Mae to restate its past earnings.

And in Ohio, Attorney General Jim Petro said he had begun an investigation into whether Fannie Mae’s accounting practices caused losses to the state’s public pension funds.

Execs to go before Congress
Company executives have been called before Congress next week to explain the accounting lapse and what the regulators cited as management’s drive to meet Wall Street expectations to the detriment of accurate bookkeeping.

The regulators have accused Fannie Mae executives of failing to fully cooperate with their investigation and raised the possibility of a management shake-up.

Fannie Mae’s chairman and chief executive, Franklin Raines, and the chief financial officer, Timothy Howard, are expected to testify at a House Financial Services Committee on Wednesday. The housing office regulators singled out Howard for blame in the accounting improprieties, saying in a report of their investigation that he failed to provide adequate oversight.

“The hearing has the potential to be painfully embarrassing for Fannie Mae itself and for the Fannie officials who testify,” Carnell said.

Fannie Mae and Freddie Mac together stand behind some $4 trillion of home mortgages — more than three-fourths of the single-family mortgages in the country. They pump money into the home mortgage market by buying and guaranteeing repayment of billions of dollars of home loans each year from banks and other lenders, then bundling them into securities that are resold to investors.

Last year, Freddie Mac restated $4.5 billion in earnings and ousted top executives. Also, there were investigations by the SEC and the Justice Department. That led the housing office to examine Fannie Mae’s accounting. Freddie Mac eventually was fined a record $125 million in a settlement with regulators.

© 2012 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.


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