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Regulator Tells Fannie Mae to Fix Its Books

The mortgage giant's accounting has been the subject of much debate among investors.

The debate over

Fannie Mae



accounting took a new twist Thursday with a slap from the company's regulator.

The Office of Federal Housing Enterprise Oversight, or OFHEO, released a copy of a letter it sent the Washington, D.C.-based company, criticizing Fannie Mae's books. The letter takes issue with the accounting treatment the giant mortgage finance firm uses to value a big portfolio of bonds backed by mobile home and aircraft leases.

The letter states the finance firm "is not applying the proper accounting standard with respect to determining asset impairments and revenue recognition" for those bonds.

Fannie wasn't immediately available for comment. But OFHEO Director Armando Falcon says the accounting treatment used by Fannie Mae "does not reflect the earnings volatility associated with these assets." Falcon says Fannie needs to immediately revise its accounting treatment in order to provide investors with "high-quality earnings information."

Regulators seem particularly concerned about the standard Fannie has been using to determine when the leases that back these bonds become impaired -- something that can have a major impact on the value of the bond portfolio. The government agency is concerned that Fannie is not recognizing any impairment to the underlying leases and bonds in a timely fashion.

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The news comes on the heels of an article in Thursday's editions of

The Wall Street Journal

reporting that Fannie has been seeking

Securities and Exchange Commission

support for its accounting in the face of OFHEO questions.

In recent months, there has been a lot of debate about the valuations Fannie has been giving to its $8 billion portfolio of mostly mobile home bonds.

In the first quarter, Fannie reported a $10.7 million impairment in the value of its mobile home backed bonds, compared to a $67.4 million impairment charge a year ago.

Most on Wall Street were not aware that Fannie had aircraft lease-backed bonds on its books. An analyst who covers the company, suspects that the bonds are hidden in accounts called 'nonmortgage investments' in Fannie's financial statements. At last count, that broad class of investments was valued at about $27 billion.

Some Fannie skeptics believe that the mortgage finance firm may have overstated earnings and capital in 2003 by failing to take the appropriate amount of losses on these bonds.

OFEHEO is in the process of reviewing Fannie's accounting, a process that could cause the firm to restate its finances.