The staff of the Securities and ExchangeCommission has ordered Fannie Mae ( FNM) torestate its financials over the last four years.

The decision comes as a huge blow to the nation'sbiggest mortgage company, whose bookkeeping has comeunder increasing fire in recent months. The companyand its top officers, including CEO Franklin Raines,have repeatedly defended Fannie's accountingpractices.

SEC Chief Accountant Donald Nicolaisen, in astatement released late Wednesday, said thegovernment-sponsored company's accounting for 2001through mid-2004 "did not comply in material respects"with accounting rules for derivatives, financialinstruments used to hedge against interest rateswings, and for some transactions related to loans, The Associated Press reported.

Fannie said this fall that a restatement couldforce it to report after-tax losses on its derivativestransactions of as much as $9 billion. The lossescould cause the company to become severelyundercapitalized, an event that potentially couldforce it to sell stock or assets to raise money.

The SEC findings come on top of a scathing reportfiled this fall by Fannie's regulator, the Office ofFederal Housing Enterprise Oversight. OFHEO contendedFannie Mae deliberately violated accounting rules inan effort to smooth out quarterly earnings, meetfinancial projections and boost bonuses for its topexecutives.

A Fannie spokesman indicated the company wouldcomply with the SEC ruling, according to news reports.

Fannie shares rose 30 cents Wednesday to $70.69.

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