Fri Aug 20, 2004

WASHINGTON, Aug 20 (Reuters) - Regulators investigating Fannie Mae's accounting practices have sent subpoenas to the No. 1 U.S. mortgage finance company in connection with the probe, a source familiar with the matter said on Friday.

Fannie Mae's financial regulator, the Office of Federal Housing Enterprise Oversight, began looking into the company's books after an accounting scandal at rival mortgage enterprise Freddie Mac (FRE.N: Quote, Profile, Research) led to a $5 billion earnings restatement and the ouster of top executives last year.

Regulators uncovered errors in the way Fannie Mae (FNM.N: Quote, Profile, Research) accounted for investments that had lost value and directed it in May to correct those errors. The company avoided an earnings restatement, but had to take a $278 million charge in the second quarter.

OFHEO Director Armando Falcon told Congress in July that Fannie Mae had been less than fully cooperative in meeting his office's requests for information and employee availability. Falcon said he had complained to the company in writing.

OFHEO did not immediately respond to requests for comment.

A Fannie Mae official declined to discuss the issue.

Freddie Mac's accounting woes and disarray led to calls for tougher regulatory oversight of the two publicly traded companies, which are chartered by Congress to assist the mortgage finance markets. But legislation ground to a halt when the Treasury Department said it wasn't strong enough.

In the meantime, administration officials said they would pressure the companies to accept tighter controls on their activities through regulatory measures.

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