Fannie Mae 2001 Annual Report Download - page 47

consistent and early market signal of credit risk for investors.
By the end of 2003, Fannie Mae intends to issue sufficient
subordinated debt to bring the sum of total capital and
outstanding subordinated debt to at least 4 percent of on-
balance sheet assets, after providing adequate capital to
support off-balance sheet MBS. Total capital and
outstanding subordinated debt represented 3.4 percent of
on-balance sheet assets at December 31, 2001.
Fannie Mae’s Portfolios and Capital Committee, chaired by
the Chief Financial Officer, determines interest rate risk and
credit risk pricing thresholds, formulates corporate hedging
strategies, and ensures compliance with economic and
regulatory risk-based capital requirements. Fannie Mae
assesses capital adequacy using an internally developed
stress test methodology. The stress test model calculates
the amount of capital required under different economic
scenarios based on the company’s statutory standard.
Fannie Mae also uses this model to estimate the potential
amount of capital needed to carry out the company’s mission
during a period of economic distress. Based on the results of
this model and other factors, Fannie Mae makes decisions
on the risk structure of its business.
Regulatory Environment
Fannie Mae is subject to capital adequacy standards
established by the Federal Housing Enterprises Financial
Safety and Soundness Act of 1992 (1992 Act) and continuous
examination by OFHEO, which was also established by the
1992 Act. The capital adequacy standards require that
Fannie Mae’s core capital equal or exceed a minimum capital
standard and a critical capital standard. Table 20 shows
Fannie Mae’s core capital at year-end 2001 and 2000
compared with the requirements.
TABLE 20: CAPITAL REQUIREMENTS
December 31,
Dollars in millions 2001 2000
Core capital1. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $25,182 $20,827
Required minimum capital2. . . . . . . . . . . . . . . . . . 24,182 20,294
Excess of core capital over minimum capital . . . . $1,000 $533
Required critical capital3. . . . . . . . . . . . . . . . . . . . $12,324 $10,337
Excess of core capital over required
critical capital . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,859 10,490
1 The sum of (a) the stated value of outstanding common stock; (b) the stated value of outstanding
noncumulative perpetual preferred stock; (c) paid-in capital; and (d) retained earnings. Core capital
excludes accumulated other comprehensive income (AOCI).
2The sum of (a) 2.50 percent of on-balance sheet assets; (b) .45 percent of outstanding MBS; and
(c) .45 percent of other off-balance sheet obligations, which may be adjusted by the Director of OFHEO
under certain circumstances (See 12 CFR 1750.4 for existing adjustments made by the
Director of OFHEO).
3The sum of (a) 1.25 percent of on-balance sheet assets; (b) .25 percent of outstanding MBS; and
(c) .25 percent of other off-balance sheet obligations, which may be adjusted by the Director of OFHEO
under certain circumstances.
The 1992 Act also established risk-based capital
requirements for Fannie Mae and required OFHEO to
adopt regulations establishing a risk-based capital test. On
September 13, 2001, OFHEO published a final risk-based
capital rule in the Federal Register. On February 20, 2002,
OFHEO finalized amendments to the final rule. Under the
1992 Act, the final regulations are enforceable one year after
publication in the Federal Register. Management is
continuing its review and analysis of the final rule and the
finalized amendments. Results of Fannie Mae’s interim risk-
based capital stress test, which Fannie Mae discloses under its
voluntary safety and soundness initiatives, indicate that
Fannie Mae is in full compliance with its capital
requirements.
Mortgage-Backed Securities
Outstanding MBS held by investors other than Fannie Mae
grew 22 percent to $859 billion at December 31, 2001 from
$707 billion at December 31, 2000. MBS issues acquired by
other investors increased $240 billion to $345 billion from
$105 billion in 2000, while liquidations of outstanding MBS
acquired by other investors increased $112 billion to
$201 billion. The increase in MBS issuances and liquidations
in 2001 was attributable to the decline in mortgage interest
rates during the year.
To tal MBS outstanding, including MBS held in Fannie Mae’s
portfolio, grew 22 percent to $1.290 trillion at year-end 2001
from $1.058 trillion at year-end 2000. Total MBS issues,
including MBS held in Fannie Mae’s portfolio, increased
150 percent to $528 billion from $212 billion in 2000, while
total MBS liquidations grew 158 percent to $296 billion
from $115 billion in 2000.
{ 45 } Fannie Mae 2001 Annual Report
Total MBS Outstanding