WASHINGTON — The Justice Department has begun a criminal investigation into mortgage giant Fannie Mae, which has been accused of earnings manipulation and has been ordered to revamp its accounting, it was learned Thursday.
An accounting crisis emerged last week at the embattled government-sponsored company, which is the largest financer of home mortgages in the country.
A federal agency that oversees Fannie Mae and its sibling company, Freddie Mac, cited serious accounting problems after eight months of investigating. Also, the Securities and Exchange Commission is conducting a preliminary inquiry.
Fannie Mae shares, which had declined more than 13 percent last week, lost $2.85 Thursday to close at $63.40 on the New York Stock Exchange.
The Justice Department's investigation was confirmed by a person with knowledge of that probe, first reported in Thursday's Wall Street Journal. The person spoke on condition of anonymity.
Department spokesman Bryan Sierra declined comment, as did Brian Faith, a spokesman for Washington-based Fannie Mae.
Regulators from the Office of Federal Housing Enterprise Oversight have provided their findings about Fannie Mae to the Justice Department and the SEC. The agency cited in a report an instance in 1998 in which accounting for $200 million in expenses was put off to a future reporting period so executives could receive full bonuses.
"The government could use the bonus plan to help show a motive for overly aggressive accounting," said Richard Carnell, a law professor at Fordham University who was an assistant Treasury secretary for financial institutions in the Clinton administration.
Fannie Mae's board agreed this week to the agency's demands for revamped accounting and an increased capital cushion against risk.
The OFHEO regulators said Thursday that the recalculations they ordered may force Fannie Mae to restate its past earnings.
And in Ohio, Attorney General Jim Petro said he had launched an investigation into whether Fannie Mae's accounting practices caused losses to the state's public pension funds.
Company executives have been called before Congress next week to explain the accounting lapse and what the regulators cited as management's drive to meet Wall Street expectations to the detriment of accurate financial reporting.
The regulators have accused Fannie Mae executives of failing to fully cooperate with their investigation and raised the possibility of a management shake-up.
Analyst Edwin Groshans of investment banking firm Fox-Pitt, Kelton said in a research report that public demands for the resignations of chairman and chief executive Franklin Raines and chief financial officer Timothy Howard "will be heeded."
Raines and Howard are expected to testify at the hearing next Wednesday by the House Financial Services Committee. The OFHEO regulators singled out Howard for blame in the accounting improprieties, charging in the report of their ongoing investigation that he failed to provide adequate oversight.
"The hearing has the potential to be painfully embarrassing for Fannie Mae itself and for the Fannie officials who testify," Carnell said.
Fannie Mae and Freddie Mac together stand behind some $4 trillion of home mortgages — more than three-fourths of the single-family mortgages in the country. They pump money into the home mortgage market by buying and guaranteeing repayment of billions of dollars of home loans each year from banks and other lenders, then bundling them into securities that are resold to investors.
Contributing: Curt Anderson