The Securities and Exchange Commission’s chief accountant has advised embattled mortgage giant Fannie Mae to correct its past accounting and restate its financial statements.

Fannie Mae said last month that such a correction would mean the company might have to record $9 billion in previously unreported losses.

“Fannie Mae’s accounting practices did not comply in material respects” with two accounting rules, said Donald Nicolaisen, the SEC’s chief accountant, in a written statement. “Fannie Mae internally developed its own unique methodology.”

Fannie Mae’s regulator, the Office of Federal Housing Enterprise Oversight, earlier this year released a scathing 211-page report alleging the company used improper accounting techniques. The shareholder-owned company, chartered by Congress to keep a steady flow of mortgage funds for the nation’s housing market, asked the SEC to review its accounting.

In a written statement, Fannie Mae SVP Chuck Greener said the company “will take the steps necessary to comply fully with the SEC’s determination…The determination made by the SEC will have a negative impact on our minimum capital position, and we are committed to taking the steps necessary to comply with our minimum capital requirement.”

Nicolaisen said Fannie Mae did not meet the requirements for hedge accounting and said the company’s method of assessing, measuring and documenting hedge ineffectiveness was inadequate. Additionally, he said, “Fannie Mae failed to record timely adjustments to the recorded amount of its loans based on changes in the estimated speed with which those loans would be prepaid.”

In October, Fannie’s CEO Franklin Raines told a congressional hearing he believed Fannie Mae followed generally accepted accounting principles and that its independent auditor, KPMG, reviewed the application of the company’s accounting standards and concurred with them.

“Our accounting staff has repeatedly determined that our policies and practices…are reasonable and in accord with GAAP, and KPMG has issued unqualified opinions on our financial statements. That remains their position today,” Raines said in October. “Our purpose in describing our approach to these standards is not to argue that we are right and OFHEO is wrong. What we want to demonstrate is that we intended to do the right thing and we took care to the right thing.”

Fannie Mae’s stock was trading at $69.04 Thursday afternoon, a drop since Wednesday’s close of $70.69.


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