Fannie Mae, the number 1 U.S. mortgage finance company, may have to alter its earnings outlook because of rising interest rates, its chief finance officer said on Tuesday.

Speaking at the company's annual meeting, CFO Timothy Howard said: "The dynamics of the interest rate market are likely to change again ... and if warranted we will update 2004 guidance at the end of the second quarter."

Treasury yields and mortgage rates have risen sharply in recent weeks as stronger jobs growth and a pick-up in inflation have led the market to price in the first stages of monetary policy tightening from the Federal Reserve. Higher mortgage rates could slow demand for and the issuance of mortgage debt.

The shift in the fixed income market is also undermining a popular strategy known as the carry trade -- borrowing at or near the Fed's overnight rate of 1 percent and then investing in longer-term instruments.

Fannie Mae earned $7.91 per share in 2003, up 75 percent from $4.52 per share in 2002. Wall Street analysts forecast 2004 full-year earnings at $7.99 per share.

Franklin Raines, Fannie Mae's chairman, acknowledged controversy about regulation of the mortgage provider but did not speak directly to worries that the firm may need to restate earnings. The need to assign mark-to-market value to assets creates volatility in earnings but tends to even out over time, Raines said.

On May 11, Fannie Mae said it had agreed to take a pretax charge of $240 million to $260 million in second-quarter results related to the drop in value of some assets but saw no need to restate previous results.

In recent months lawmakers have attempted to stiffen oversight of the three mortgage finance government sponsored enterprises (GSEs) -- Fannie Mae, Freddie Mac and the Federal Home Loan Banks.

"We are strongly in favor of having a strong financial regulator," Raines said, while adding it is critical to avoid steps that would limit access to affordable housing. "Fannie Mae is an instrument of national policy," he said.

RIDING DEMOGRAPHICS TO ONGOING GROWTH

Answering a question on whether Fannie Mae can be viewed as a "growth company" when U.S. housing demand is forecast to fall in 2004, Raines said housing demand is likely to grow at 8 to 10 percent, on average, in coming years. "If we can grow at that pace, we are growing faster than the economy," he said.

"By the end of the decade there will be 13 million to 15 million new American households needing homes. Some 1.8 million new homes need to be constructed each year to meet that demand," Raines said.

Steve Ashley, Fannie Mae board member, said the face of the U.S. mortgage market is set to change radically. "There is an untapped market of millions of minority families" that need access to home ownership, he said.

Fannie Mae and Freddie Mac were created by Congress to increase home ownership, buying home loans from lenders to free up money for lenders to issue more mortgages.

In afternoon trading Fannie Mae was trading at $66.80, up 4 cents, on the New York Stock Exchange after earlier falling to a nine-month low of $65.90.

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