Fannie Mae 2006 Annual Report Download - page 307

Holders of preferred stock are entitled to receive non-cumulative, quarterly dividends when, and if, declared
by our Board of Directors, but have no right to require redemption of any shares of preferred stock. Payment
of dividends on preferred stock is not mandatory, but has priority over payment of dividends on common
stock, which are also declared by the Board of Directors. If dividends on the preferred stock are not paid or
set aside for payment for a given dividend period, dividends may not be paid on our common stock for that
period. For the years ended December 31, 2006, 2005 and 2004, dividends declared on preferred stock were
$511 million, $486 million and $165 million, respectively. Except for the third quarter dividends for which the
Board of Directors declared on July 17, 2007, payable on September 30, 2007, from January 1, 2007 through
August 15, 2007, all declared quarterly dividend payments on outstanding series of preferred stock have been
paid.
After a specified period, we have the option to redeem preferred stock at its redemption price plus the
dividend (whether or not declared) for the then-current period accrued to, but excluding, the date of
redemption. The redemption price is equal to the stated value for all issues of preferred stock except Series O,
which has a redemption price of $50 to $52.50 depending on the year of redemption, and Convertible
Series 2004-1, which has a redemption price of $105,000 per share. We redeemed all outstanding shares of our
Variable Rate Non-Cumulative Preferred Stock, Series J, with an aggregate stated value of $700 million, on
February 28, 2007, and Series K, with an aggregate stated value of $400 million, on April 2, 2007.
All of our preferred stock, except those of Series D, E, O and the Convertible Series 2004-1, is listed on the
New York Stock Exchange.
18. Concentrations of Credit Risk
Concentrations of credit risk arise when a number of customers and counterparties engage in similar activities
or have similar economic characteristics that make them susceptible to similar changes in industry conditions,
which could affect their ability to meet their contractual obligations. Based on our assessment of business
conditions that could impact our financial results, including those conditions arising through August 15, 2007,
we have determined that concentrations of credit risk exist among single-family and multifamily borrowers
(including geographic concentrations and loans with certain nonconventional features), mortgage insurers,
mortgage servicers, derivative counterparties and parties associated with our off-balance sheet transactions.
Concentrations for each of these groups are discussed below.
Single-Family Loan Borrowers. Regional economic conditions affect a borrower’s ability to repay his or her
mortgage loan and the property value underlying the loan. Geographic concentrations increase the exposure of
our portfolio to changes in credit risk. Single-family borrowers are primarily affected by home prices and
interest rates. The geographic dispersion of our Single-Family business has been consistently diversified over
the three years ended December 31, 2006, with our largest exposures in the Southeast region and the Western
region of the United States, each of which represented 24% of our single-family conventional mortgage credit
book of business as of December 31, 2006. Except for California, where 16% and 17% of the gross unpaid
principal balance of our conventional single-family mortgage loans held or securitized in Fannie Mae MBS as
of December 31, 2006 and 2005, respectively, were located, no other significant concentrations existed in any
state. No region or state experienced negative home price growth over this three-year period.
To manage credit risk and comply with legal requirements, we typically require primary mortgage insurance
or other credit enhancements if the current LTV ratio (i.e., the ratio of the unpaid principal balance of a loan
to the current value of the property that serves as collateral) of a single-family conventional mortgage loan is
greater than 80% when the loan is delivered to us. We may also require credit enhancements if the original
LTV ratio of a single-family conventional mortgage loan is less than 80% when the loan is delivered to us.
Multifamily Loan Borrowers. Numerous factors affect a multifamily borrower’s ability to repay his or her
loan and the property value underlying the loan. The most significant factor affecting credit risk is rental
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)