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Serious problems found by regulators at Fannie Mae, prompting SEC inquiry

Updated:
WASHINGTON (AP) _ Regulators have discovered serious accounting problems at mortgage giant Fannie Mae, prompting an inquiry by the Securities and Exchange Commission and calling into question its financial soundness, the company disclosed Wednesday. Its shares fell 7 percent.

The board of the government-sponsored company has named a special committee of outside directors to respond to a newly revealed accounting crisis at the second-largest U.S. financial institution behind Citigroup.

The developments come a little more than a year after Freddie Mac, Fannie Mae's competitor in the multitrillion-dollar home mortgage market, disclosed that it had understated profits by some $4.5 billion for 2000-2002 in an effort to smooth earnings and maintain its image as a steady performer.

On Monday, federal regulators who have been investigating Fannie Mae's accounting for eight months, submitted a report to its board that found earnings manipulation, lax internal controls and a corporate culture ``that emphasized stable earnings at the expense of accurate financial disclosures,'' according to a letter to the directors.

The letter from the Office of Federal Housing Enterprise Oversight was disclosed in a public statement Wednesday by Ann McLaughlin Korologos, the presiding director of the Fannie Mae board.

The report says the findings ``are serious and raise doubts concerning the validity of previously reported financial results, the adequacy of regulatory capital, the quality of management supervision, and the overall safety and soundness'' of Fannie Mae, according to Korologos' statement.

Korologos also disclosed the preliminary inquiry by the SEC.

In addition, Korologos said, the Fannie Mae board has named a committee made up entirely of independent directors to deal with the accounting matters.

Last October, Fannie Mae disclosed a $1.2 billion accounting error for the third quarter, which it said was due to a change in accounting rules and did not affect net income.

Shares in Fannie Mae fell $5.64 in midday trading on the New York Stock Exchange, where Freddie Mac shares lost 4 percent, or $3.04, to $65.96.

Fannie Mae and Freddie Mac were created by Congress to pump money into the home mortgage market by buying home loans from lenders and packaging them as securities for sale on Wall Street. They have grown explosively in recent years and now stand behind $4 trillion of home mortgages, representing more than three-fourths of the single-family mortgages in the country.
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