NCPA - National Center for Policy Analysis

Fannie Mae Raises Eyebrows Over Maneuver to Boost Shareholder Equity

October 25, 2002

Fannie Mae (the Federal National Mortgage Association) is under fire again over a recent accounting decision that boosted a key measure of its financial health -- shareholder equity.

That is defined as the total value of a company after its liabilities are subtracted from its assets. Fannie Mae's had been dropping for some time, as the value of some of the company's hedging instruments fell along with interest rates.

  • Shareholder equity has dropped from $20.75 billion at the end of the first quarter to a reported $14.96 billion at the end of the third quarter.
  • But the quasi-governmental mortgage lender's shareholder equity would have been a lot worse in the third quarter had the company not taken advantage of an accounting provision that allowed it to reclassify $135 billion in mortgage assets of its choosing as "available for sale" -- meaning the assets could be sold, rather than held in portfolio as usual.
  • Under generally accepted accounting principles, such a move requires companies to record the assets available for sale at their current market value.
  • In this case, the move resulted in a gain of roughly $4 billion that counted toward Fannie Mae's shareholder equity -- even though the company may never sell the securities or realize the gain.

Without the boost, Fannie Mae's shareholder equity would have been roughly $11 billion -- only a little more than half its level six months ago.

Attention was drawn to the controversial maneuver by Rep. Richard Baker (R-La.), a long-time Fannie Mae critic. Other critics speculated that Fannie Mae was intentionally trying to obscure the true nature of its financial position.

Source: Patrick Barta, "Fannie Mae Critics Pounce on Boost in Holder Equity," Wall Street Journal, October 25, 2002.

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