Fannie Mae 2006 Annual Report Download - page 46

The lack of current financial and operating information about the company, along with the restatement
of our consolidated financial statements and related events, have had, and likely will continue to have, a
material adverse effect on our business and reputation, including increased regulatory requirements and
legislative and regulatory scrutiny.
We are subject to risks associated with our announcement in December 2004 that we would restate our
previously filed consolidated financial statements. The 2004 Form 10-K that we filed in December 2006,
which included restated consolidated financial statements for the years ended December 31, 2003 and 2002
and the six months ended June 30, 2004, was the first periodic report we filed with the SEC since August
2004. Since that time, we have filed our 2005 Form 10-K and this 2006 Form 10-K. Our need to restate our
historical financial statements, the delay in producing both restated and more current consolidated financial
statements and related problems have had, and in the future may continue to have, an adverse effect on our
business and reputation. In addition, we believe that the negative publicity to which we have been subject as a
result of our restatement of prior period financial statements and related problems has further contributed to
declines in the price of our common stock, an increase in the regulatory requirements to which we are subject,
and in legislative and regulatory scrutiny of our business, and could increase our cost of funds and affect our
customer relationships.
We are subject to pending civil litigation that, if decided against us, could require us to pay substantial
judgments, settlements or other penalties.
A number of lawsuits have been filed against us and certain of our current and former officers and directors
relating to our accounting restatement. These suits are currently pending in the U.S. District Court for the
District of Columbia and fall within three primary categories: a consolidated shareholder class action lawsuit
and two related individual securities actions filed by institutional investors; a consolidated shareholder
derivative lawsuit; and a consolidated Employee Retirement Income Security Act of 1974 (“ERISA”)-based
class action lawsuit. The consolidated shareholder derivative action was dismissed on May 31, 2007, but the
plaintiffs have initiated an appeal with the U.S. Court of Appeals for the District of Columbia, and, in
addition, two new derivative actions have been filed. We may be required to pay substantial judgments,
settlements or other penalties and incur significant expenses in connection with the consolidated shareholder
class action and consolidated ERISA-based class action, which could have a material adverse effect on our
business, our results of operations and our cash flows. In addition, our current and former directors, officers
and employees may be entitled to reimbursement for the costs and expenses of these lawsuits pursuant to our
indemnification obligations with those persons. We are also a party to several other lawsuits that, if decided
against us, could require us to pay substantial judgments, settlements or other penalties. These include a
proposed class action lawsuit alleging violations of federal and state antitrust laws and state consumer
protection laws in connection with the setting of our guaranty fees and a proposed class action lawsuit alleging
that we violated purported fiduciary duties with respect to certain escrow accounts for FHA-insured
multifamily mortgage loans. We are unable at this time to estimate our potential liability in these matters. We
expect all of these lawsuits to be time-consuming, and they may divert management’s attention and resources
from our ordinary business operations. More information regarding these lawsuits is included in “Item 3—
Legal Proceedings” and “Notes to Consolidated Financial Statements—Note 20, Commitments and
Contingencies.”
The occurrence of a major natural or other disaster in the U.S. could increase our delinquency rates and
credit losses or disrupt our business operations and lead to financial losses.
The occurrence of a major natural disaster, terrorist attack or health epidemic in the U.S. could increase our
delinquency rates and credit losses in the affected region or regions, which could have a material adverse
effect on our financial condition and results of operations. For example, we experienced an increase in our
delinquency rates and credit losses as a result of Hurricane Katrina. In addition, as of December 31, 2006,
approximately 16% of the gross unpaid principal balance of the conventional single-family loans we held or
securitized in Fannie Mae MBS and approximately 26% of the gross unpaid principal balance of the
multifamily loans we held or securitized in Fannie Mae MBS were concentrated in California. Due to this
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