The Safety Net That Never Was – Part XXI
I don’t know how she did it with everything else exploding around Doom Castle yesterday, but Twist picked up on this [1] mildly startling OFHEO press release. Once again, an important Fannie Mae story has been slipped in during a period of slack attention, hidden under a smokescreen of competing RE news.[2] As I write this, neither blog nor MSM has picked up on OFHEO’s announcement. It’s likely that a couple of the usual suspects, perhaps DSNews or Calculated Risk, will mention this. Hopefully they’ll provide some insight. What’s the bottom line? Around four years ago, and again around three years ago, Fannie Mae was "significantly", but not "severely", undercapitalized. I take this to mean that in retrospect there should have been a yellow caution flag out from OFHEO at those two historic periods.
Anyway, yesterday marks the start of what will likely prove to be an agonizingly slow financial striptease. At issue: Just what was the capital position of America’s second largest financial institution over the last few years? Had Fannie’s accounting systems been up to speed at the end of 2002, and again at the end of 2003, these assessments would certainly have rocked the company’s share prices and much more besides.
"OFHEO is also issuing updated capital results for the fourth quarters for 2002, 2003, and 2004 as a result of Fannie Mae’s recent 2004 10-K release. [footnote 1 in text] With the new information, OFHEO has reclassified Fannie Mae as significantly undercapitalized for the fourth quarters of 2002 and 2003."
[text of footnote 1] "Fannie Mae requested, and OFHEO granted, an extension of 15 business days for the refiling of Q1-3 2004 quarterly capital results. OFHEO also granted a waiver regarding the refiling of Q1-3 2002 and 2003 quarterly results, although OFHEO has informed Fannie Mae that it will disclose Fannie Mae’s estimated quarterly results for these years. Fannie Mae’s analysis of the risk-based capital results for all applicable periods also received an extension. Once OFHEO receives and analyzes this information, additional disclosures will be forthcoming."
It would be worthwhile to note that financial reports like these, when done on time, rely heavily on computer models and forecasts. Fannie’s accountants are faced with the advantages and disadvantages of now having (more or less) perfect information about the near term future relative to the 10-Q deadlines for 2002Q4 and 2003Q4. This has got to be an unusual situation in accounting history given the magnitude of the restatement errors and the importance of forecasting in Fannie’s business. Their new CFO Bob Blakely has fixed some big messes, but surely nothing like this. As well, they’ve got to be careful what they release when. Since analysts may look at newly revealed historical trends in Fannie’s capital position as hints pointing at Fannie’s present situation, giving a wrong impression might have unfortunate effects.
Of course, if we are still entertaining that Big Bath theory that all the bad news is coming out now, perhaps these two historic quarters are the only stinkers. Then future revelations will paint a better and better picture. Let’s hope so, anyway. 
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Notes and References
[1]: "OFHEO ANNOUNCES THIRD QUARTER 2006 MINIMUM AND RISK-BASED CAPITAL CLASSIFICATION FOR FANNIE MAE; RECLASSIFIES FOURTH QUARTER 2002 AND 2003 AS SIGNIFICANTLY UNDERCAPITALIZED", press release – source OFHEO, December 28, 2006.
[2]: The biggest story of Dec 28th was the release of data suggesting to some that the US real estate market was close to a bottom. David "Baghdad Bob" Lereah, NAR Chief Economist, actually called the RE bottom yesterday.
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Congratulations to HousingWire for being first up.[3] Big swing and a miss over at the P-D.[4] Is the MSM embargoing this story, or are they simply missing its significance? OK, maybe the bulk of America’s business reporters are on holiday this slow news week.
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[3]: “OFHEO: Fannie Significantly Undercapitalized During 2002, 2003″, by P. Jackson, HousingWire blog, December 28, 2006.
[4]: “MORTGAGES: Fannie Mae is ‘adequately capitalized’ “, St. Louis Post Dispatch, December 29, 2006.
Jan-Martin, Help! [5]
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[5]: “OFHEO: Fannie Mae und Freddie Mac angemessen kapitalisiert”, Dow Jones / Finanztreff, December 29, 2006.
Finally!
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[6]: “Fannie, Freddie have ‘adequate’ capital- regulator”, Patrick Rucker, Reuters, December 29, 2006.
Meh. I was the associate publisher and managing editor at DS News for the past two years, and launched the daily website for the publication before moving on.
You forgot of course, to note that Housing Wire picked up on this story yesterday.
And that I picked up on Fannie’s announcement of new servicing guidelines today…..
Have a great New Year, guys. Keep up the good work.
housingguy (WireGuy on the sidebar if that’s OK) -
Didn’t forget. You were up on the sidebar last night. You can see an acknowledgement in comment #1 above.
I’ve seen some good stuff at DSNews‘s web site. So you’re a pro? Good for you.
New servicing guidelines? Oops, missed that one. Thanks for the kind words. See you again soon.
Shows you how good my reading skills can be after some egg nog. Missed that first comment….whoops. ‘Bout as good as my typo last night on the story that is the subject of this very post.
I don’t think you missed the new servicing guidelines – I got a copy of the announcement about an hour before it was posted for servicers. Friends in high places.
housingguy -
Thanks for the reminder (I’d promised myself a slug of eggnog earlier, but had forgotten).
OK, I give up. E-mail subscription to HousingWire is now in effect.
Can someone explain to me why I should be concerned in 2007 that Fannie Mae may be have been undercapitalzed a little over 2 years ago?
NVMike-
I’ll need to borrow John’s tin foil hat here for a minute. These guys haven’t reported in years- and now they are admitting that they were undercapitalized during the GOOD years. I’m wondering what that means about where they are now. [I'm afraid John has me hooked on his favorite soap opera!]
NVmike -
Easy, it’s because the windshield is still muddy, but now they’ve cleaned off some of the back window.
In fact, OFHEO had classified Fannie as significantly undercapitalized for 2004, and this report opts not to update that judgment. What they are saying is that Fannie was operating low on capital for at least 2 1/4 years, and quite possibly more, before OFHEO noticed. On the other hand they think the levels are OK now, but won’t be certain until they get good up to date numbers.