Fannie Mae 2006 Annual Report Download - page 31

(2)
The source of this data is HUD’s analysis of data we submitted to HUD. Some results differ from the results we
reported in our Annual Housing Activities Reports for 2005 and 2004. Actual results reflect the impact of provisions
that allow us to estimate the affordability of units with missing income and rent data.
(3)
Goals are expressed as a percentage of the total number of dwelling units financed by eligible mortgage loan
purchases during the period.
(4)
Home purchase subgoals measure our performance by the number of loans (not dwelling units) providing purchase
money for owner-occupied single-family housing in metropolitan areas.
(5)
The multifamily subgoal is measured by loan amount and expressed as a dollar amount.
As shown by the table above, we were able to meet our housing goals and subgoals in 2006 and 2004. In
2005, we met all three of our housing goals and three of the four subgoals. We fell slightly short of the low-
and moderate-income home purchase subgoal.
The housing goals are subject to enforcement by the Secretary of HUD. The subgoals, however, are treated
differently. Pursuant to the 1992 Act, the low- and moderate-income housing subgoal and the underserved
areas subgoal are not enforceable by HUD. However, HUD has taken the position that the special affordable
subgoals are enforceable. HUD’s regulations state that HUD shall require us to submit a housing plan if we
fail to meet one or more housing goals and HUD determines that achievement was feasible, taking into
account market and economic conditions and our financial condition. The housing plan must describe the
actions we will take to meet the goal in the next calendar year. If HUD determines that we have failed to
submit a housing plan or to make a good faith effort to comply with the plan, HUD has the right to take
certain administrative actions. The potential penalties for failure to comply with the housing plan requirements
are a cease-and-desist order and civil money penalties. Because the low- and moderate-income home purchase
subgoal is not enforceable, there was no penalty for our failing to meet this subgoal in 2005.
We have made significant adjustments to our mortgage loan sourcing and purchase strategies in an effort to
meet the increased housing goals and subgoals. These strategies include entering into some purchase and
securitization transactions with lower expected economic returns than our typical transactions. We have also
relaxed some of our underwriting criteria to obtain goals-qualifying mortgage loans and increased our
investments in higher-risk mortgage loan products that are more likely to serve the borrowers targeted by
HUD’s goals and subgoals, which could further increase our credit losses. The Charter Act explicitly
authorizes us to undertake “activities ... involving a reasonable economic return that may be less than the
return earned on other activities” in order to support the secondary market for housing for low- and moderate-
income families. We continue to evaluate the cost of these activities.
Meeting the higher goals and subgoals for 2007 in the face of previous increases in home prices and, more
recently, higher interest rates, which have reduced housing affordability during the past several years, is
extremely challenging. Since HUD set the home purchase subgoals in 2004, the housing markets have
experienced a dramatic change. Home Mortgage Disclosure Act data released in 2006 show that the share of
the primary mortgage market serving low- and moderate-income borrowers declined in 2005, reducing our
ability to purchase and securitize mortgage loans that meet the HUD subgoals. The National Association of
REALTORS»housing affordability index has dropped from 130.7 in 2003 to 106.1 in 2006. In addition,
because subprime mortgages tended to meet many of the HUD goals and subgoals, the recent disruption in the
subprime market has further limited our ability to meet these goals. Our housing goals and subgoals continue
to increase in 2007 and 2008. If our efforts to meet the housing goals and subgoals prove to be insufficient,
we may become subject to a housing plan that could require us to take additional steps that could have an
adverse effect on our profitability. See “Item 1A—Risk Factors” for more information on how changes we are
making to our business strategies in order to meet HUD’s housing goals and subgoals may reduce our
profitability.
OFHEO Regulation
OFHEO is an independent office within HUD that is responsible for ensuring that we are adequately
capitalized and operating safely in accordance with the 1992 Act. OFHEO has examination authority with
respect to us, and we are required to submit to OFHEO annual and quarterly reports on our financial condition
and results of operations. OFHEO is authorized to levy annual assessments on Fannie Mae and Freddie Mac,
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