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Published: Friday, 12/31/2004

Fannie Mae's 'cooked' books

FEW Americans know very much about the Federal National Mortgage Association, familiarly known as Fannie Mae among congressmen and investors who believe you can't go wrong in putting money into mortgages.

But there is a $9 billion hole in the Fannie Mae financial ledgers, and as a result its high-flying chief executive, Franklin Raines, is now looking for other markets for his talents, albeit with an annual income of $1.3 million as his consolation prize.

Rumors have flown about Fannie Mae's accounting practices for some time. The giant government-backed mortgage company, founded in the days of Franklin D. Roosevelt's New Deal, was ordered by the Security and Exchange Commission to make accounting corrections that will wipe out about a third of its reported profits since 2001.

Many people still like FNMA as an investment, but plainly the agency will have to rein in its arrogance, which Mr. Raines, a former Clinton administration budget director, seemed to epitomize. He had taken issue with Federal Reserve economists, who said Fannie Mae provided only slight benefits to consumers. In the 1990s a Fannie Mae spokesman referred to those economists as "pencil brains."

Interim chief executive officer Daniel H. Mudd plans to create a new image, which will include listening to critics. Many conservatives dislike the company, in part because its name and its credit line with the U.S. Treasury suggest that its bonds have government backing.

Commercial banks object to the ambivalent role that Fannie Mae plays in the all-important mortgage market. Its defenders, however, maintain that it tends to dampen mortgage rates and is particularly important to low- and middle-income families.

Nothing about the Bush Administration's attitude regarding assistance to poor people suggests that it is time to turn the mortgage industry in its entirety over to private banks and other private lenders. The White House takes a Social Darwinian view of such matters, which could be defined as survival of the financially fittest.

Mr. Raines had his defenders in Congress, and even after his ouster, the Executive Leadership Council, the nation's leading organization of senior African-American corporate executives in Fortune 500 companies, expressed dismay over the "early retirement" of Mr. Raines. Notwithstanding that support, there is little doubt that creative accounting has been used to boost Fannie Mae's profit figure.

Interestingly enough, whistle blowers and a little-known regulatory agency, the Office of Federal Housing Enterprise Oversight, played an important role in the investigation of the mortgage company.

Fannie Mae may be able to weather any regulatory storms it may encounter in the future. But self-proclaimed foes of "big gummint" will surely work to remove any advantages such programs as Fannie Mae offer to would-be home buyers whose incomes might not make them welcome in the more conventional mortgage banking channels.


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