Fannie Mae Tweaks Cost Accounting

In its much-anticipated fourth-quarter earnings release, scheduled for Wednesday, Fannie Mae (FNM) will introduce a slight change in the way it accounts for bad loans, according to the company.

Tuesday morning, the market was thick with chatter about an accounting change at Fannie, but a company spokeswoman says the change won't affect the overall level of costs related to bad loans, and will have no impact on earnings per share.

However, charge-offs, the industry term for bad loans, will be higher -- and the company expects to reclassify five quarters' worth of charge-off numbers in its release Wednesday, according to spokeswoman Janis Smith.

Fannie's accounting has come under investor scrutiny because of its heavy use of pro forma earnings presentation and because extreme moves in interest rates have stressed its balance sheet. Tuesday, Fannie stock was off 40 cents, or 0.57%, to $69.60.

Fannie, a government-sponsored enterprise that insures and buys mortgage loans, discloses an overall number for credit costs, made up of charge-offs and foreclosed property expenses. In the third quarter, total credit costs were a mere $13.9 million. Charge-offs were a negative $39.3 million, reflecting strong recoveries, while foreclosed property expenses were $53.2 million. Because of a change in accounting guidance, Fannie has to move the costs of selling foreclosed property into the charge-offs line, says Smith. That reduces the foreclosed property line, leaving overall credit costs unchanged.

The impending change was communicated to Wall Street analysts, leading to complaints among some investors that Fannie was selectively disclosing potentially market-moving information. But Smith says: "We've not reported anything material and we haven't reported any numbers."

>To order reprints of this article, click here: Reprints