FANNIE MAE Mortgage financier agrees to boost risk cushion, but at a cost

The requirement will likely cut the mortgage giant's profits.
WASHINGTON (AP) -- Fannie Mae's agreement to boost its capital cushion against risk, revamp its accounting and tighten its internal controls is a crucial step toward ensuring its financial soundness, regulators say. It also could have far-reaching effects on the home-mortgage giant.
The government-chartered mortgage financier agreed to make the changes under pressure from federal regulators, who last week accused it of pervasive earnings manipulation to meet Wall Street expectations -- and in one case to meet target levels for the award of executive bonuses. The accord was announced Monday, after a week of negotiations that stretched over the weekend.
Some experts say that the mandate for Fannie Mae to increase its reserve capital by mid-2005 could crimp profits, slow growth or force the sale of assets for the biggest financier and guarantor of home mortgages in the country.
The new capital requirement "theoretically could make mortgages more expensive," said Keith Gumbinger, a vice president at HSH Associates, a publisher of mortgage information based in Pompton Plains, N.J.
"Those funds to build reserves have to come from some place, most likely profits on products they sell," he said. "So rather than seeing pass through increases [in interest rates] to the consumer, it's likely their profitability will be trimmed over the next period."
Reports' reliability
Furthermore, other analysts noted, the requirement for the company to recalculate its accounting for derivatives and spreading out the cost of expenses over time creates uncertainty over the reliability of its past financial reports.
Still, analysts at credit-rating agency Standard & amp; Poor's -- which last week said it was considering downgrading some of Fannie Mae's debt -- said Monday they were "encouraged" by the speed with which the company and the federal agency had reached accord.