New Fannie Inspection UPDATE

In afternoon trading Monday, Fannie Mae shares dropped 4.8 percent, to $50.69, dropping below the recent 52-week closing low of $53.20. FNM shares are down by more than a third since September.

In addition to Fannie's recent troubles, a new investigation has been launched into it's interpretation of accounting rules regarding FNMA assets held under MBS (Mortgage Backed Securities) trusts. Fannie is the guarantor for $1.4 trillion of MBS held by other investors, Fannie draws a fee for guaranteeing those payments will be made.

Fannie Mae uses trusts to issue securities backed by the home mortgages that it buys from lenders and bundles together for resale to investors worldwide. Fannie Mae then collects fees from the banks and other lenders that sell it mortgages for guaranteeing loan payments in the event of default by homeowners.

The assets and liabilities of the trusts issuing the mortgage-backed securities are not recorded on Fannie Mae's balance sheet because Fannie has deemed them to be so-called qualifying special purpose entities under Fannie's interpretation of accounting rules.

Fannie claims that the MBS trusts meet the definition of QSPE (Qualified Special Purpose Entity) under FAS 140 Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. Fannie has not recorded the assets in these trusts on the balance sheet. Fannie is the trustee for the trusts, so the assets are not Fannies.

However, on any MBS put in trust, after Jan 1st, 2003, Fannie is ultimately responsible for the timely payment of principal and interest, whether or not they share primary default risk on loans that underlying the MBS. Fannie has another $550 Billion in MBS, in its own portfolio, bringing total MBS to $1.8 Billion. I got one thing to say, HOLY COW, Batman!

Ben Jones @ The Housing Bubble has some lucid comments regarding Fannie:
More Questions at Fanron. And I really like his moniker FANRON....although FANNIEWORLD or FANNIECOM might fit as well.

"This is looking more like Enron every day. If regulators find Fannie should have accounted for those trusts on its balance sheet, it would substantially boost the amount of capital the company must hold. That would drive profits way down."

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