Fannie Mae 2010 Annual Report Download - page 48

growth, investments and asset acquisitions, overall risk management processes, management of credit and
counterparty risk and recordkeeping. FHFA may also establish any additional operational and management
standards the Director of FHFA deems appropriate.
Affordable Housing Goals and Duty to Serve. We discuss our affordable housing goals and our duty to serve
underserved markets below under “Housing Goals and Duty to Serve Underserved Markets.”
Affordable Housing Allocations. The GSE Act requires us to set aside in each fiscal year an amount equal to
4.2 basis points for each dollar of the unpaid principal balance of our total new business acquisitions, and to
allocate such amount to certain government funds. The GSE Act also allows FHFA to suspend allocations on a
temporary basis. In November 2008, FHFA advised us that it was suspending our allocations until further
notice.
Executive Compensation. The GSE Act directs FHFA to prohibit us from providing unreasonable or non-
comparable compensation to our executive officers. FHFA may at any time review the reasonableness and
comparability of an executive officer’s compensation and may require us to withhold any payment to the
officer during such review. FHFA is also authorized to prohibit or limit certain golden parachute and
indemnification payments to directors, officers and certain other parties. FHFA has issued rules relating to
golden parachute payments, setting forth factors to be considered by the Director of FHFA in acting upon his
authority to limit such payments.
Fair Lending. The GSE Act requires the Secretary of HUD to assure that the GSEs meet their fair lending
obligations. Among other things, HUD is required to periodically review and comment on the underwriting
and appraisal guidelines of each company to ensure consistency with the Fair Housing Act. HUD is currently
conducting such a review.
Capital Adequacy Requirements
The GSE Act establishes capital adequacy requirements. The statutory capital framework incorporates two
different quantitative assessments of capital—a minimum capital requirement and a risk-based capital
requirement. The minimum capital requirement is ratio-based, while the risk-based capital requirement is
based on simulated stress test performance. The GSE Act requires us to maintain sufficient capital to meet
both of these requirements in order to be classified as “adequately capitalized.” However, during the
conservatorship, FHFA has suspended capital classification of us and announced that our existing statutory and
FHFA-directed regulatory capital requirements will not be binding. FHFA has advised us that, because we are
under conservatorship, we will not be subject to corrective action requirements that would ordinarily result
from our receiving a capital classification of “undercapitalized.”
Minimum Capital Requirement. Under the GSE Act, we must maintain an amount of core capital that equals
or exceeds our minimum capital requirement. The GSE Act defines core capital as the sum of the stated value
of outstanding common stock (common stock less treasury stock), the stated value of outstanding non-
cumulative perpetual preferred stock, paid-in capital, and retained earnings, as determined in accordance with
GAAP. Our minimum capital requirement is generally equal to the sum of 2.50% of on-balance sheet assets
and 0.45% of off-balance sheet obligations.
Effective January 1, 2010, we adopted new accounting standards that resulted in our recording on our
consolidated balance sheet substantially all of the loans backing our Fannie Mae MBS. However, FHFA has
directed us, for purposes of minimum capital, to continue reporting loans backing Fannie Mae MBS held by
third parties based on 0.45% of the unpaid principal balance. FHFA retains authority under the GSE Act to
raise the minimum capital requirement for any of our assets or activities.
Risk-Based Capital Requirement. The GSE Act requires FHFA to establish risk-based capital requirements
for Fannie Mae and Freddie Mac, to ensure that we operate in a safe and sound manner. Existing risk-based
capital regulation ties our capital requirements to the risk in our book of business, as measured by a stress test
model. The stress test simulates our financial performance over a ten-year period of severe economic
conditions characterized by both extreme interest rate movements and high mortgage default rates. FHFA has
stated that it does not intend to publish our risk-based capital level during the conservatorship and has
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