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SEIFFE:  The Real Story on Fannie Mae

Thursday, October 2, 2008 

By Ralf Seiffe

From the Office of Federal Housing Enterprise Oversight (OFHEO) report of the auditors making a special examination of Fannie Mae in 2004.  This is the document that caused such dyspepsia for Republicans and inspired such confidence for Democrats on the recently circulating YouTube video.

MEMORANDUM TO: Armando Falcon, Jr., Director
FROM: Christopher H. Dickerson, Chief Compliance Examiner
SUBJECT: Fannie Mae Special Examination
DATE: September 17, 2004

Attached are the findings to-date of the special examination of Fannie Mae. The matters detailed in this report are significant and warrant your immediate attention. This report is the result of a collective effort by the Office of Compliance, the Office of the Chief Accountant, and other OFHEO staff, as well as technical support provided by accountants from Deloitte & Touche, LLP. During our examination, we have reviewed more than 200,000 documents and e-mails, and have interviewed and taken sworn testimony from numerous current and former Fannie Mae employees. Our examination is continuing and we will keep you apprised of our findings.

The report continues continues in the Executive Summary:

We are currently conducting a Special Examination of Fannie Mae’s accounting policies, internal controls, and financial reporting processes. Although the examination is still in process, our findings to-date are serious and warrant a report at this juncture. This report details the Special Examination’s concerns on the framework and conditions of Fannie Mae’s accounting policies and internal controls, with a particular focus on two critical accounting areas: deferred price adjustments, and derivatives and hedging activities.

We have determined that Fannie Mae, in developing policies and practices in these critical areas, has misapplied Generally Accepted Accounting Procedures (“GAAP”), specifically Accounting for Nonrefundable Fees and Coss Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases (“SFAS 91”) and Accounting for Derivative Instruments and Hedging Activities (“SFAS 133”). The misapplications of GAAP are not limited occurrences, but are pervasive and are reinforced by management. The matters detailed in this report are serious and raise concerns regarding the validity of previously reported financial results, the adequacy of regulatory capital, the quality of management supervision, and the overall safety and soundness of the Enterprise.

Special Examination of Fannie Mae Privileged & Confidential Disclosure and/or Duplication Prohibited

Emphasis added and read the rest of the 211 page report here.

Ralf Seiffe advises business start-ups and product launches from Chicago, Illinois and is a political analyst and columnist for the Illinois Leader and Illinois Review.

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