Fannie Mae Execs Defend Accounting Change

The AP reports:

Fannie Mae executives on Friday defended a change in the way the mortgage finance company calculates losses on home loans, responding to analysts' concerns as its stock price fell.

Shares of Fannie, the largest U.S. buyer and backer of home loans, fell more than 3 percent. They recovered from an earlier dive of more than 16 percent and a decline of 10 percent the day before.

The chief financial officer and other executives of the government-sponsored company, which reported a $1.4 billion third-quarter loss last week, held a conference call with Wall Street analysts to address fears that the new bookkeeping method could downplay the number of bad loans that Fannie holds, and consequently its potential losses.

Analysts peppered the executives with questions in a skeptical tone. The way Fannie discloses its mortgage losses, addressed in an article published online Thursday by Fortune, raises extra concern among analysts given that Fannie Mae was racked by a $6.3 billion accounting scandal in 2004 that tarnished its reputation and brought government sanctions against it.

Moreover, the skepticism from Wall Street comes as Fannie seeks approval from the government to raise the cap of its investment portfolio.

The chief financial officer, Stephen Swad, said in the call that some of the $670 million in provisions for credit losses on soured home loans that Fannie wrote off in the third quarter likely would be recovered.

"We book what we book under (generally accepted accounting principles) and we provide this disclosure to help you understand it," Swad said.

When it reported a more than doubling of its third-quarter losses last week, Fannie said it changed how it calculates the ratio of its credit losses from mortgages in default.

Using the new method, it reported, on an annual basis, a credit-loss ratio of 4 basis points for the first nine months of this year -- meaning the company lost money on four of every 1,000 mortgages it holds on its $2.4 trillion book.

Yet the Fortune article points out that if the old method were retained, the credit-loss ratio for that period would be 7.5 basis points -- far exceeding Fannie Mae's forecasts.

Several analysts asked the executives in the conference call why the company couldn't disclose what proportion of high-risk mortgages it is able to refinance into fixed-rate loans and save from default.

"The problem is that we don't have the underlying information," said Credit Suisse analyst Moshe Orenbuch.

In midday trading, Fannie's shares fell $1.54 to $41.50.

Here's a monthly chart.