Fannie Accounting

NEW YORK (Reuters) – Franklin Raines, chief executive officer of Fannie Mae, the nation’s largest home mortgage finance company, said it does not face the same accounting questions as its smaller rival sister Freddie Mac.

On June 9, Freddie Mac replaced its top three executives over an accounting probe about how the No. 2 U.S. mortgage finance company manages its $1.29 trillion portfolio of assets using derivatives to hedge interest rate risk.

In an interview with Business Week Magazine, Raines said he did not know much about the way in which Freddie Mac operates, but when it came to accounting for derivatives, “(Fannie Mae) maintain(s) strict control over what kind of derivatives can be used and our accounting for them.”

“We are compulsive about managing risk,” Raines told the magazine.

Raines said the idea that problems at Freddie spell problems at Fannie is not true. He also dismissed the idea that regulations need to be beefed up in order to catch accounting problems.

“This is more of a governance and management-control question than a regulatory question,” Raines said, adding he did not think Congress will take any regulatory action against Fannie Mae.

Raines said Fannie Mae’s size and scope, with over $6 trillion in mortgage debt outstanding now, is vital because it is able to “manage and disburse risk in ways that smaller institutions cannot.”

Freddie Mac is now planning to restate its books. This stems from how Freddie Mac applied some accounting rules on the derivatives it uses to hedge interest rate risk, and may largely boil down to a difference of opinion between auditors.

Fannie Mae’s FNM.N stock closed on Thursday at $70.90 compared to $74.94 in the session prior to the June 9th announcement. Freddie Mac’s FRE.N stock ended Thursday’s session at $51.35 versus $59.87 prior to the announcement.

Also on Thursday Fannie Mae sold $2 billion worth of debt, with heavy amounts of buying from investors based in Asia.