Report Sparks Change at Fannie Mae

The pressure is building on Fannie Mae (FNM Quote) chief Franklin Raines.

The nation's biggest mortgage buyer late Thursday revealed it amended the contract terms of Raines and other top executives. The changes affect how and why they could be fired for cause, a move that would limit or altogether eliminate big payoffs if circumstances forced them to leave the company.

The changes -- disclosed in a filing with the Securities and Exchange Commission late Thursday -- follow a recommendation in a 211-page report from Fannie's regulator that paints an ugly picture of accounting games, loose audit controls and poor management supervision. The report, from the Office of Federal Housing and Enterprise Oversight, will likely lead to a restatement of past earnings, a round of regulatory fines and calls on Capitol Hill for greater oversight of the government-sponsored financial firm.

Shares fell $1.15 to $66 in premarket trading Friday, putting them down 15% for the week.

Considering the housecleaning that rival Freddie Mac (FRE Quote) endured following similar allegations last year, some observers wonder how long Raines can maintain his credibility with investors.

"I don't think Franklin Raines will survive it, and that's a shame," says Janet Tavakoli, a structured finance and derivatives consultant. "But he was on notice with what happened at Freddie, and there was burden of due diligence on Raines to put his house in order."

Howard's End?

For now, while regulators note that "ultimate responsibility" for the veracity of Fannie's financial statements rests with Raines, they heap most of the blame for Fannie's longstanding earnings management on the firm's chief financial officer and vice chairman, Tim Howard. The report squarely points the finger at Howard for the "pervasive" deviations from standard accounting rules.

"The special examination found that the chief financial officer, Tim Howard, failed to provide adequate oversight to key control and reporting functions with Fannie Mae," the report says. "We further found that Mr. Howard was instrumental in setting financial targets as vice chairman, and had the authority to meet these targets as chief financial officer."