Fannie Mae, the biggest source of money for U.S. home loans, said Tuesday it will spend $800 million this year on accountants and lawyers to correct $10.8 billion worth of bookkeeping mistakes, bringing the total bill to $1.37 billion.
The money will be used to pay auditor Deloitte & Touche LLP, law firm Paul, Weiss, Rifkind, Wharton & Garrison and hundreds of consultants, Fannie Mae said in a filing with the Securities and Exchange Commission. Fannie Mae also said it uncovered errors related to off-balance-sheet trusts used to sell $25.5 billion of mortgage-backed securities.
Fannie Mae said even with the new mistakes, it meets the capital-reserve requirement mandated by its federal regulator, a sign to some investors that the government-chartered company is making headway under chief executive Daniel Mudd to clean up accounting left over from prior management. The company reiterated that it plans to complete an earnings restatement in the second half of the year.
“There’s a very high probability that there isn’t a dark cloud out there” that will increase the restatement, said Arvind Sachdeva, who oversees $3 billion at Victory Capital Management in Cleveland, including Fannie Mae stock.
Banc of America Securities LLC raised its recommendations on Fannie Mae to “neutral” from “sell,” and on Freddie Mac to “buy” from “neutral.”
Total administrative expenses during the first quarter were $729 million, with $287 million of that going toward the restatement, Fannie Mae said. Costs related to the restatement totaled $569 million in 2005.
“We are committed to devoting all resources necessary to complete the restatement as expeditiously as possible,” Fannie Mae said in the SEC filing.
Fannie Mae said it won’t know the impact of the new errors until it completes the restatement, which covers the period from 2001 to mid-2004. It also reduced its estimated after-tax losses resulting from Hurricanes Katrina and Rita to a range of $170 million to $280 million from $250 million to $400 million.
Fannie Mae’s federal regulator, the Office of Federal Housing Enterprise Oversight, ordered an accounting overhaul after finding in 2004 that the company deferred expenses to minimize earnings volatility and broke rules in accounting for hedges on its then-$905 billion portfolio.
