Fannie Mae, Freddie Mac Spanked For New Accounting Problems

Is this any surprise, both Freddie Mac and Fannie Mae are now being told to moderate their aggressive accounting methods and be more prudent on the numbers they are reporting. The issue is a bit esoteric but coming after the accounting scandals that enveloped the agencies in the past year, any hint of impropriety should be taken seriously.

With the housing and credit markets in trouble, Fannie Mae and Freddie Mac’s role is to be the rock in the sea of turbulence. If they are committing shenanigans and/or fraud they could further undermine the housing markets and create even more turmoil. No one is expecting the companies to post stellar profits, but they expect them to be the ethical foundation of the housing industry.

The regulator for Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE), the Office of Federal Housing Enterprise Oversight, told the government-chartered buyers of mortgage debt Monday that they must be judicious in using fair-value accounting rules or they will be barred from them.

At issue is accounting standard No. 159, known as the Fair Value Option for Financial Assets and Financial Liabilities. The standard allows a firm to shift its accounting of an asset from “book value” to “fair market value.” The practice can, in certain situations, produce gains when the value of a security declines.

“It is important that Fannie Mae and Freddie Mac apply fair value in a sound and consistent manner,” said OFHEO Director James B. Lockhart. “Although Fannie Mae and Freddie Mac are using fair value for only a portion of their assets and liabilities, the use of fair value should help dampen fluctuations in earnings caused by their large derivative portfolios.”