Fannie Mae had its biggest two-day decline in 20 years after executives failed to alleviate investor concern following a report that speculated it may have understated its credit losses.
Business publisher Fortune released an article on its website reporting that the mortgage-finance giant was hiding its growing credit losses through a change in the way it reports its exposure to risky home loans.
The government-sponsored mortgage company reported a credit-loss ratio between 4 and 6 basis points in August this year. In a report released by the company last week of its Q3 financial results, it reported its annualized credit-loss ratio at just 4 basis points.
Fannie Mae said the calculation was derived through a new and different accounting methodology from the one previously used to calculate the range it forecast in August. According to the article released by fortune, the company's credit loss ratio would be 7.5 basis points if it was using the old methodology.
A conference call was arranged on Friday with Fannie's CFO and other executives, in which the company attempted to explain the change, according to the Associated Press. CFO Stephen Swad said Fannie Mae expected to recover a portion of the $670 million in provisions for credit losses on bad mortgages that the company wrote off in Q3.
The accounting has the effect of pulling forward losses well before they are realized, Swad said. Some loans we have seen cured at no expense.
U.S. accounting rules states Fannie Mae must record the fair value of the loans, or the price the assets could receive in a market transaction.
Fannie shares slipped as low as $36.86 before recovering. The stock closed down 5.46 percent to $40.69.