WASHINGTON, Sept. 27 /PRNewswire-FirstCall/ -- Fannie Mae (NYSE: FNM)
today announced it has entered into an agreement with the Office of Federal
Housing Enterprise Oversight (OFHEO) to take a series of steps with respect to
its internal controls, organization and staffing, governance, accounting, and
capital. Pursuant to the agreement, Fannie Mae will achieve and maintain a
capital surplus target of 30 percent within the next 270 days and protect its
capital surplus of 18 percent as of August 31, 2004.
"Fannie Mae's Board of Directors is pleased to have worked cooperatively
with the Director and staff of OFHEO in reaching this agreement
expeditiously," said Ann McLaughlin Korologos, Presiding Director of Fannie
Mae's Board. "I would like to thank the Director and his staff for their
accessibility and hard work. These are significant steps and the Board is
fully committed to their timely implementation. The Board and the company
have been working together to address the issues raised by OFHEO and will work
closely to implement the agreement's provisions."
"Management appreciates the Board's appropriate leadership role in this
process and the hard work it has done over the past several days," said
Franklin D. Raines, Chairman and CEO of Fannie Mae. "We are in full support
of today's agreement. Working with the Board and the company's regulators, we
will begin to take steps immediately to comply with and implement the terms of
the agreement."
A copy of the agreement is available at
http://www.fanniemae.com/media/pdf/issues/092704.pdf and also is attached.
Fannie Mae is a New York Stock Exchange company and the largest non-bank
financial services company in the world. It operates pursuant to a federal
charter and is the nation's largest source of financing for home mortgages.
Fannie Mae has pledged through its "American Dream Commitment" to expand
access to homeownership for millions of first-time home buyers; help raise the
minority homeownership rate to 55 percent; make homeownership and rental
housing a success for millions of families at risk of losing their homes; and
expand the supply of affordable housing where it is needed most. Since 1968,
Fannie Mae has provided $6.3 trillion of mortgage financing for 63 million
families. More information about Fannie Mae can be found on the Internet at
http://www.fanniemae.com.
Style Usage: Fannie Mae's Board of Directors has authorized the company
to operate as "Fannie Mae," and the company's stock is now listed on the NYSE
as "FNM." In order to facilitate clarity and avoid confusion, news
organizations are asked to refer to the company exclusively as "Fannie Mae."
United States of America
Office of Federal Housing Enterprise Oversight (OFHEO)
and
Federal National Mortgage Association (Fannie Mae)
Agreement
The Office of Federal Housing Enterprise Oversight (OFHEO) and the Federal
National Mortgage Association (Fannie Mae), as authorized by its Board of
Directors (the Board), hereby agree that Fannie Mae shall undertake the
following:
I. Accounting
The Board, consistent with its fiduciary duties, shall commence
immediately to address the following accounting matters:
1. Controls
(a) The Board shall cause to be conducted a review of internal controls
relating to accounting as well as staffing, resources, the quality and
routine provision of information to senior management and the Board and
the effectiveness of the corporate code of conduct and on any planned
revisions to avoid actions that do not support appropriate corporate
goals and legal requirements. The Board shall report to and consult with
OFHEO on the results of such reviews.
(b) The Board shall report to OFHEO on any planned revisions in the area
of accounting for alteration of reporting lines, independence of a
function to evaluate models employed in accounting, the role of external
auditor and internal procedures (including strengthening the role of the
internal auditor) as well as new positions to remedy any determined
weaknesses.
(c) The Board shall direct the separation of the function of business
planning and forecasting from the controller's function.
(d) The Board shall direct a separation of modeling and accounting
functions.
2. SFAS 91
In addressing SFAS 91, Fannie Mae shall take the following actions:
(a) Fannie Mae will implement a policy for amortization of deferred price
adjustments in a manner that requires the company to book the entirety of
the company's modeled catch-up provisions on a quarterly basis, beginning
in the fourth quarter of 2004.
(b) In addition, Fannie Mae shall undertake the following:
(i) Test amortization factors based on methods provided by OFHEO to
determine if amortization amounts are based on the estimated lives
of the underlying loans and securities;
(ii) Supply a formal, comprehensive summary of existing methods and
practices to actively manage the calculation of amortization;
(iii) Identify all amounts treated as "acquisitions" within the
amortization system that are not premiums, discounts or deferred price
adjustments. Other amounts should be subjected to review by the
outside accounting firm, referred in section VI. (2) External
Assistance and OFHEO Access, for compliance with GAAP, including but
not limited to realignment differences, system/methodology conversion
adjustments, "on-tops" reported as factor change adjustments and all
other "on-tops;"
(iv) Recalculate amortization for each quarterly period from 1998 to
2004 using parameters provided by OFHEO and submit results to OFHEO;
(v) Assess the difference between amounts previously recorded and
newly calculated amounts for all periods from 1998 through 2004 and
provide a comprehensive analysis employing all qualitative factors
provided by OFHEO; and,
(vi) Evaluate the impact of realignment differences related to process
and modeling on prior financial statement periods (eg., effect of the
security master project).
(c) Fannie Mae shall consult with OFHEO regarding the methods and other
matters relating to the implementation of the requirements of this
section.
3. SFAS 133
In addressing SFAS 133, Fannie Mae shall take the following actions:
(a) Fannie Mae shall make any changes necessary to comply with SFAS 133
and, accordingly, shall reevaluate accounting treatment going forward for
all derivatives.
(b) (i) Beginning the first quarter of 2005, Fannie Mae will cease hedge
accounting for any derivatives, including terminated hedges, that do not
or did not qualify under SFAS 133 for such treatment. Additionally,
Fannie Mae will implement long-haul accounting where applicable for
derivative transactions for which hedge accounting has been elected and
will accordingly cease use of its current accounting practice for those
transactions at that time. This implementation will be subject to review
and approval by OFHEO.
(ii) Until implementation of (i) above, Fannie Mae shall:
(A) assure full and appropriate disclosures regarding this agreement
and the accounting and internal control issues that are the subject of
OFHEO's examination;
(B) designate a portion of the capital surplus against cumulative
ineffectiveness of existing hedge accounting relationships that are
currently under review in this section in consultation with and
approval by OFHEO;
(C) continue to eliminate hedge accounting relationships associated
with offsetting derivative positions; and,
(D) consult with OFHEO regarding implementation of changes, including
systems alterations, to its accounting for derivatives employing the
long-haul accounting method.
(c) Recalculate and retest historic accounting treatment under SFAS 133
for previously reported financial statements for all quarterly periods
from 2001 through 2004 using parameters provided by OFHEO. Fannie Mae
shall provide a comprehensive analysis employing all qualitative factors
provided by OFHEO;
(d) After recalculation and retesting under (c), report to OFHEO the
impact on previously reported quarterly financial statements and
resulting effect on regulatory capital; and,
(e) Fannie Mae shall consult with OFHEO for the methods and other matters
relating to the implementation of the requirements of this section,
including submission of evaluations, testing and recalculations.
4. Other Board Actions
(a) The Board shall cause to be conducted a review of accounting policies
and other corporate policies to ensure that they accurately reflect the
Board's objectives in complying with law and regulation and in overseeing
the operations of Fannie Mae.
(b) The Audit Committee shall maintain at least one person with
sufficient technical expertise to understand the implications of
accounting policies to financial statements.
II. Capital
The Board, consistent with its fiduciary obligations, shall cause the
company to undertake the following actions in the area of capital:
1. Capital Surplus
(a) To avoid any impairment of capital, Fannie Mae will establish and
maintain a targeted capital surplus over the required minimum capital
requirement (subject to conditions and variations approved in advance by
the Director) as calculated on a monthly basis by Fannie Mae.
(b) Specifically, Fannie Mae will establish and maintain a capital
surplus compliant with the following conditions:
(i) Effective immediately, Fannie Mae will protect the existing
capital surplus to ensure it is maintained at or above the percentage
of the required minimum capital requirement at the most recent month-
end prior to the date of signing this agreement. In any event, the
surplus as a percent of the required minimum capital requirement shall
not fall below the amount of capital held as of the date of this
agreement and reflective of internally generated month-end August 2004
results.
(ii) Within 270 days, Fannie Mae will, in accordance with a capital
plan developed by Fannie Mae and approved by OFHEO as described in
section 2. Capital Plan, achieve and maintain a targeted capital
surplus equal to 30% of the required minimum capital requirement.
Fannie Mae will maintain this additional capital surplus until the
Director determines the requirement should be modified or expire,
considering factors such as resolution of the accounting and internal
control issues that are the subject of OFHEO's examination.
2. Capital Plan
Within 45 days, Fannie Mae shall develop and submit to OFHEO a capital
plan acceptable to the Director that shall include:
(a) The primary strategies which Fannie Mae will employ to protect the
existing capital surplus and achieve the additional targeted capital
surplus requirement as specified above, including an assessment of the
relative and aggregate contributions of these strategies and actions;
(b) Projections for growth and capital requirements based upon a detailed
analysis of Fannie Mae's assets, liabilities, earnings, fixed assets, and
off-balance sheet activities;
(c) Contingency plans that identify alternative methods should the
primary strategies above be insufficient to achieve and maintain the
required surplus; and,
(d) Analysis of proposed or undertaken corporate actions (e.g., payment
of common stock or preferred stock dividends) and the impact upon Fannie
Mae's ability to achieve and maintain the capital surplus within
specified time frames.
3. Limitation on Certain Corporate Actions
(a) Fannie Mae shall obtain the Director's prior written approval before
engaging in any of the following: any payment made to repurchase, redeem,
retire or otherwise acquire any of its shares, including share
repurchases; the calling of any preferred stock; the payment of preferred
stock dividends above stated contractual rates; or, until Fannie Mae
reaches the targeted capital surplus, the payment of common stock
dividends in excess of the prior quarter's dividend. Fannie Mae shall
inform OFHEO of any other significant action that is likely to impair the
ability of Fannie Mae to manage to the required capital surplus.
(b) Pursuant to 12 U.S.C. 4514(b), Fannie Mae shall submit a written
report to the Director after the declaration of any common stock capital
dividends and before making the capital distribution. The report shall
contain specific information on the amount of the dividend, the rationale
for the payment, and the impact on the required capital surplus.
4. Monthly Reports
Fannie Mae will continue to submit to OFHEO month-end minimum capital
reports, no later than 30 days after the end of each month. These shall be
reconciled to the general ledger and continue to include the official
declaration that is currently part of these reports. Fannie Mae will also
submit its most current internal weekly management reports and projections
detailing growth and other criteria that impact the maintenance of the
additional capital surplus. OFHEO will monitor, discuss, and validate these
reports on a periodic basis, including determining whether to reduce the
capital surplus amount.
III. Organization and Staffing
The Board shall cause to be conducted an independent review of
organizational, structural and staffing and control issues, focusing on but
not limited to, the CFO, controllers, accounting, audit, financial reporting,
business planning and forecasting, modeling and financial standards functions
in line with overall enhancement of accounting, controls and fostering a
culture of adherence to proper corporate policies and legal and other external
requirements. Such review shall include:
(a) lines of reporting,
(b) independence of functions,
(c) segregation of duties,
(d) alignment of functions,
(e) roles and responsibilities,
(f) staff qualifications,
(g) key person dependencies; and,
(h) adequacy of resources.
IV. Compensation
The Board shall cause to be prepared a report to OFHEO on the compensation
regime and its relation to strategic plans and their impact on accounting and
transaction decisions and any revisions to avoid inappropriate incentives.
V. Governance and Internal Controls
1. Governance Procedures
The Board shall cause to be conducted a review of its governance
procedures that will assure timely and appropriate review of accounting and
control issues at the company. This review shall address committee
structures, resources, reporting requirements, procedures and quality of
financial disclosures and potential changes to management and internal systems
to meet the Board's oversight responsibilities. The Board shall report to
OFHEO on the results of such review.
2. Chief Risk Officer
The Board shall direct the appointment of a chief risk officer, to be
independent of other corporate responsibilities and to have duties crafted in
consultation with OFHEO.
3. Internal Auditor Independence
The Board shall take steps to assure the independence of the internal
auditor, including the ability of the auditor to report directly to the Audit
Committee or the Board.
VI. Other Provisions
1. Presentation of Comprehensive Plan
Within fifteen days of the date of this agreement, the Board shall provide
a comprehensive written plan to OFHEO addressing matters of supervisory
concern detailed herein. OFHEO will inform the Board of the completeness of
such plan and provide its approval or disapproval.
2. External Assistance and OFHEO Access
(a) The Board or its compliance committee shall hire within 45 days an
independent counsel and an independent accounting firm, subject to
OFHEO's approval, reporting directly to the Board or committee, to
conduct reviews called for in this agreement. The firms shall
immediately commence a comprehensive review of the company's accounting
policies and practices to ensure they accurately reflect the Board's
objectives in complying with law and regulation and in overseeing the
operations of Fannie Mae.
(b) Such independent legal and accounting firms or other relevant firms
shall have full access to books, records, e-mails, staff and resources in
conducting their review and making their reports and recommendations.
(c) OFHEO shall have access independent of Fannie Mae to the meet with
and review work plans and product of firms, including receipt of interim,
draft and final reports, required to be engaged under this agreement and
may require meetings of the Board or Fannie Mae with such firms where
OFHEO is present. Work product of such firms shall be preserved.
3. Compliance
(a) The Board shall appoint a compliance committee to monitor and
coordinate compliance with this agreement. Such committee shall consist
of outside directors, at least three in number and one of whom shall
serve as chair. The committee and its chair should be prepared to meet
with OFHEO representatives.
(b) The Board or committee shall establish a tracking system in
consultation with OFHEO that will allow the Board and OFHEO to monitor
the implementation and progress under this agreement. Reporting shall be
no less frequent than monthly and shall provide for timely reporting of
material events.
4. Contacts
Key contacts shall be established at Fannie Mae, at the Board and at OFHEO
to assure prompt attention to questions arising under this agreement.
5. Effect of Agreement
(a) This Agreement is binding and may be enforced by OFHEO as a "written
agreement" for purposes of 12 USC 4631. This Agreement is effective
until modified or terminated in writing by OFHEO.
(b) This Agreement does not supplant any other duties or obligations of
the Board and Fannie Mae or affect the authority of other government
agencies.
(c) Each provision of this Agreement shall remain effective and
enforceable until modified, terminated or suspended in writing by the
Director. The Director and Fannie Mae understand that in determining
whether to take such steps, consideration shall be given to whether
internal controls of Fannie Mae have been enhanced and are consistent
with safety and soundness and whether Fannie Mae's accounting policies
and methodology are satisfactory to OFHEO.
6. Savings Clauses
(a) Nothing contained herein precludes additional actions by OFHEO on
matters addressed by this Agreement or discovered in the course of
carrying forward the actions provided for herein nor action by OFHEO on
matters subsequently raised by its ongoing review of Fannie Mae.
(b) In entering into this Agreement, Fannie Mae neither admits nor
denies any wrongdoing or any asserted or implied finding in this
Agreement.
Agreed to this 27th day of September, 2004.
Armando Falcon, Jr. Ann McLaughlin Korologos
Director for the Board of Directors
Office of Federal Housing on behalf of Fannie Mae
Enterprise Oversight
SOURCE Fannie Mae
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Related links:
http://www.fanniemae.com
Company News On-Call:
http://www.prnewswire.com/comp/305450.html
CONTACT:
Chuck Greener of Fannie Mae, +1-202-752-2616
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