Fannie Mae directors agree to correct accounting treatments, raise capital surplus.

OFFICE OF FEDERAL HOUSING ENTERPRISE Oversight (OFHEO) Director Armando Falcon Jr. announced an agreement with the Fannie Mae board of directors requiring immediate action to address the improper accounting and inadequate controls detailed in OFHEO's findings to date of its special examination.

The agreement requires Fannie Mae to:

* implement correct accounting treatments that will bring it into compliance with SFAS 91 and SFAS 133 accounting standards;

* protect the existing capital surplus and move to a targeted capital surplus equal to 30 percent of its required minimum capital.

* undertake a top-to-bottom review of staff structure, responsibilities, independence of functions, compensation and incentives.

* appoint an independent chief risk officer and separate other key business functions currently performed jointly by certain individuals or departments.

* put in place policies to assure adherence to accounting rules and new internal controls.

"The serious concerns raised in OFHEO's report require prompt action," Falcon said. "This agreement is an important step toward resolving these concerns and helping to assure safe and sound operations at the [government-sponsored] enterprise. I want to commend the board of Fannie Mae for moving quickly to address a complex set of issues."

The agreement provides specific steps and timetables. Other matters, raised by OFHEO's examination, including management accountability, remain under active review.

In October testimony before the Subcommittee on Capital Markets, Insurance and Government-Sponsored Enterprises, Falcon stated: "[OFHEO's report of findings] have implications in four areas of major concern to OFHEO: the validity of Fannie Mae's previously reported financial results; the adequacy of its regulatory capital; the quality of senior management's supervision of the enterprise; and Fannie Mae's overall safety and soundness. The accounting problems OFHEO identified focus on two critical areas: premiums, discounts and deferred price adjustments associated with mortgages and mortgage-backed securities; and derivatives and hedging activities," Falcon said in his testimony.

"[T]he special examination is continuing," Falcon said. "If OFHEO discovers more problems, we may take further action."