The slide in shareholder equity did not come as a surprise to Fannie Mae officials, nor has it prompted any big concerns. "As we have said before, our shareholder equity and the FAS 133 component of AOCI will move as interest rates rise and fall," Jayne Shontell, Fannie Mae senior vice president for investor relations, explains in a prepared statement on the SEC report. AOCI is the accumulated other compressive income, and FAS 133 is the Financial Accounting Standard No. 33.

During the first quarter, the five-year swap rate fell 50 basis points, and the 10-year swap rate went down 42 basis points, thus the stockholder equity decline. Other factors contributing to the numbers for this quarter include a $172-million decline in reported net interest income, and a $112-million drop in fee and other income.

"We continue to believe these changes in shareholder equity and the FAS 133 component of AOCI do not provide a full picture of our financial results because they reflect only a partial mark to market valuation of some of the hedging instruments we use to manage risk," Shontell adds.

Change is afoot and the second quarter could close with less than appealing numbers because of it. Last week, the Office of Federal Housing Enterprise Oversight concluded that Fannie Mae's accounting policies for calculating asset impairment and revenue recognition on manufactured housing and airplane lease securities was off the mark. Now, OFHEO has come up with new procedures for Fannie Mae.

"The director of OFHEO has determined that the estimation process prescribed by OFHEO provides a more rigorous and objective process for determining other-than-temporary impairment, and the SEC encouraged that conclusion," Shontell notes in the letter. "Accordingly, during the second quarter of 2004, we will implement this new estimation process."