Fannie Mae overstated earnings from 2001 through the first two quarters of 2004 by $6.3 billion, the company said Wednesday

In a Securities and Exchange System filing Wednesday, the government-backed mortgage repurchaser restated the audited results previously filed for 2002 and 2003, and unaudited financial statements for the first and second quarters of 2004. Accounting errors related to how the company handled derivatives resulted in a $7.9 billion loss after taxes — considerably less than a previous estimate of $10.8 billion.

Fannie Mae’s first 10-K report since an accounting and management scandal shook the company was hailed as a step toward a return to regular financial reporting.

“The filing of this Annual Report on Form 10-K for the year ended Dec. 31, 2004, represents a significant achievement in our efforts to return to timely financial reporting,” the company said.

Before it can resume regular financial reporting, Fannie Mae — which holds or guarantees nearly 25 percent of all U.S. mortgage debt — must complete financial statements for 2005 and 2006, which are being prepared using new management and accounting practices.

“Our efforts to change the culture of our company, to implement effective controls and governance processes, to fully staff certain areas of our operations and to build out our infrastructure are ongoing,” the company said. Fannie Mae is still fixing weaknesses in its internal controls over financial reporting, and has “significant remediation work” remaining before it will be able to file financial reports with the SEC and the New York Stock Exchange on a timely basis, the company said.

Fannie Mae’s restated annual report showed business volume fell 54 percent in 2004, from a record $1.7 trillion in 2003. Earnings that year totaled $5 billion, or $4.94 per share, compared with $8.1 billion, or $8.08 per share in 2003.

The company’s previous estimate that it had overstated earnings by $10.8 billion through mid-2004 included $8.4 billion in unreported losses on derivatives and $2.4 billion in losses on mortgage commitments. The after-tax cumulative net gains on derivative mortgage commitments were $535 million, net of related amortization. The total after-tax impact of the restatement through Dec. 31, 2004, was approximately $7.9 billion, the company said.

Fannie Mae’s share of the $10.5 trillion in U.S. residential mortgage debt as of June 30 was $2.4 trillion, or nearly 23 percent, the company said. That figure includes not only Fannie Mae’s mortgage portfolio but mortgage-backed securities guaranteed by Fannie Mae but held by third parties.

Under a May 2006 consent order from the Office of Federal Housing Enterprise Oversight, Fannie Mae has agreed to limit its mortgage portfolio to $728 billion — its level as of Dec. 31, 2005. In its 10-K filing, Fannie Mae said it plans to submit a request to OFHEO in early 2007 for approval for “modest growth” in its portfolio.

In a statement, OFHEO Director James Lockhart said that Fannie Mae’s 10-K report represented an important milestone, but that “much remains to be done.”

Lockhart said remaining concerns include how quickly Fannie Mae can return to full and timely financial reporting, the robustness of the Enterprise’s internal controls, and the accuracy of its accounting systems. 

“OFHEO will continue to monitor Fannie Mae’s efforts to correct its problems, to operate in a safe and sound manner and to maintain an adequate capital cushion during this time of uncertainty,” Lockhart said.

Fannie Mae’s restatement Wednesday is among the largest for an American company.

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