WASHINGTON (AP) — Under pressure from federal regulators,
Fannie Mae’s board has agreed to take sweeping action to
correct what were cited as serious accounting problems.

Fannie Mae agreed to boost the mortgage giant’s capital,
recalculate key transactions back to 2001 and tighten internal
controls.

The government-chartered mortgage financer and its regulator
said yesterday they had reached an agreement after negotiations
last week and over the weekend.

A week ago, the Office of Federal Housing Enterprise Oversight
told Fannie Mae that its eight-month-old investigation had found
pervasive earnings manipulation to meet Wall Street expectations
and serious accounting misdeeds. It ordered “immediate
remedial action.”

“This agreement is an important step toward resolving
these concerns and helping to assure safe and sound
operations,” Federal Housing Oversight Director Armando
Falcon said in a statement yesterday.

A Treasury official renewed the Bush administration’s call
for tighter government reins over Fannie Mae and Freddie Mac, the
other huge government-sponsored mortgage company, which faced an
accounting crisis 15 months ago.

“We think the legislation needs to be re-enacted, and the
sooner the better,” Wayne Abernathy, the assistant Treasury
secretary for financial institutions, told reporters. He said
action by lawmakers might even be possible in the few remaining
weeks before Congress adjourns. Key Republican senators and House
members also have urged such a measure.

The housing oversight regulators last week raised the
possibility of removing top management of Fannie Mae, the biggest
financer of home mortgages in the country and the second-largest
U.S. financial institution after Citigroup Inc. That’s still
possible.

The revelations pushed down Fannie Mae’s stock more than
13 percent, to a 52-week low, in a three-day slide last week. The
shares rose 53 cents to $66.04 in yesterday trading on the New York
Stock Exchange.

Neither the regulators nor the company said whether Fannie Mae
would have to restate its earnings. Freddie Mac wound up having to
restate $4.5 billion in earnings for 2000-2002.

Fannie Mae will increase its cushion of reserve capital by about
$5 billion.

To raise that money, Fannie Mae has several options. It could
issue new stock, a move that could further weaken its share price;
sell assets from its portfolio of investments, which includes
billions in mortgages plus items such as aircraft leases; or even
scale back its purchase of home mortgages, which could reduce the
supply of home loans for prospective buyers.

The company also agreed to recalculate all its transactions for
derivatives, financial instruments it uses to hedge against
interest-rate and other risk, for all quarters going back to
2001.

Morgan Stanley and Prudential Equity Group swiftly downgraded
their rating of Fannie Mae stock yesterday. “We believe that
the requirement to carry extra capital could slow (Fannie
Mae’s) growth over the near to intermediate term,”
Prudential analyst Bradley Ball said in a written statement.

Ball wrote that requiring the company to recalculate its
accounting “will at a minimum create uncertainty and
confusion surrounding (Fannie Mae’s) past and prospective
future results.”

Fannie Mae and Freddie Mac pump money into the home mortgage
market by buying 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 in the United States and around the globe.

The Securities and Exchange Commission also is investigating the
company’s accounting.

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