As it struggles with an accounting crisis, Fannie Mae faces a Monday deadline to file its third-quarter financial results — and investors are eager to learn whether the mortgage giant will be forced to restate earnings.
The government-sponsored company, cited by regulators in the Housing and Urban Development Department for serious accounting problems and accused of earnings manipulation, announced last month that it was delaying the release of its third-quarter earnings.
The regulators had ordered Fannie Mae to make massive recalculations, and the delay fueled speculation as to whether the company, which finances one of every five home loans in the United States, would restate earnings.
The accounting scandal erupted during the third quarter, on Sept. 22, when the company disclosed an investigation by the Securities and Exchange Commission.
That inquiry makes things potentially tricky for Fannie Mae, which is required by law to file its quarterly report with the agency by Monday. Also by law, the financial results must be certified by company chief executive Franklin Raines and chief financial officer Timothy Howard.
Directors stand behind accounting
If the SEC investigators turn up accounting violations in the quarter, that could expose Fannie Mae and its executives to legal liability with shareholders and others, said analyst Edwin Groshans of investment banking firm Fox-Pitt, Kelton.
Raines and Howard have publicly stood behind the company’s accounting, insisting in sworn testimony at a congressional hearing last month that the HUD regulators’ allegations of accounting improprieties and management misdeeds going back to the late 1990s were a matter of interpreting complex rules.
A restatement could lead Fannie Mae’s board to shuffle the company’s executive ranks.
By being “very vocal” in that regard, “I think they did box themselves in a little bit,” Groshans said in a telephone interview.
The stakes are high for Washington-based Fannie Mae, the second-largest financial institution in the country behind Citigroup, which also faces a criminal investigation by the Justice Department.
KPMG mum for now
It was unclear if the company’s outside auditor, Big Four accounting firm KPMG, would sign off on the third-quarter financial statements.
KPMG spokesman George Ledwith declined comment. Fannie Mae spokeswoman Janice Daue would not comment on any aspect of the third-quarter filing with the SEC.
In some cases in the past, KPMG has held off on approving companies’ statements until government investigations of their accounting were completed — because of the accounting firm’s own potential liability.
If the auditors don’t sign, Fannie Mae could ask the SEC for a five-day extension beyond the deadline.
Analysts expect 3 percent profit rise
The regulators at the HUD agency that cited the company, the Office of Federal Housing Enterprise Oversight, are undoubtedly watching developments closely. OFHEO spokeswoman Corinne Russell declined comment.
For the third quarter, analysts are expecting Fannie Mae’s profits to rise a modest 3 percent, to $1.89 a share from $1.83 a share in the July-September period of 2003.
Fannie Mae and its smaller sibling Freddie Mac 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. Their stock and debt are widely held by investors worldwide.