Fannie Mae 2004 Annual Report Download - page 129

Mortgage Investment Activity in 2003
Our mortgage purchases in 2003 increased by $172.6 billion, or 49%, from our purchases in 2002. Mortgage
originations reached a record level of $3.9 trillion in 2003 based on historically low mortgage rates,
particularly during the first half of the year, which led to significant refinancing activity in 2003. This, coupled
with a favorable spread between our debt and mortgage assets led to high levels of purchases by us, which
were partially offset by portfolio liquidations. Mortgage liquidations in 2003 increased by $179.3 billion, or
65%, from liquidations in 2002. Our purchases of mortgage assets in 2003 outpaced the amount of mortgage
liquidations by $69.6 billion, contributing to the increase in the net mortgage portfolio.
Recent Trends in Mortgage Investment Activity
Our mortgage investment activities during 2005 and 2006 were conducted within the context of our capital
restoration plan, which defined the management of “total balance sheet size by reducing the portfolio
principally through normal mortgage liquidations” as one of two key elements that would contribute to the
achievement of our capital goal. The plan also provided that, as a contingency measure to provide additional
capital, we would also consider reducing our mortgage portfolio balances through asset sales.
OFHEO announced on November 1, 2005 that we had achieved a 30% surplus over minimum capital at
September 30, 2005. Under our May 23, 2006 consent order with OFHEO, we agreed to continue to maintain
a 30% capital surplus over our statutory minimum capital requirement until the Director of OFHEO, in his
discretion, determines the requirement should be modified or allowed to expire, taking into account factors
such as resolution of accounting and internal control issues. We also agreed not to increase the size of our net
mortgage portfolio above the $727.75 billion amount of net mortgage assets held as of December 31, 2005,
except in limited circumstances at OFHEO’s discretion.
Our portfolio purchases in 2005 were significantly lower than in 2004, due to both our assessment of the
pricing for fixed-rate mortgage assets and our focus on managing our balance sheet size to achieve our capital
plan objectives. Portfolio liquidations were lower in 2005 than in 2004. Our portfolio sales in 2005 were
significantly higher than in 2004. The net impact of our purchases, liquidations and sales in 2005 was an
approximately 20% decline in the size of our net mortgage portfolio as of December 31, 2005, as compared to
year-end 2004. Similar dynamics have existed through the first nine months of 2006, resulting in a net
mortgage portfolio essentially unchanged from the end of 2005.
If market conditions change significantly, the limit on the size of our net mortgage portfolio could constrain
our ability to capitalize fully on economically attractive opportunities to add mortgage assets to our portfolio.
The portfolio limit may also affect the pace or size of sales from our portfolio, particularly when our balance
of net mortgage assets approaches the portfolio limit. We regularly meet with OFHEO to discuss current
market conditions and our mortgage and capital markets activities. In addition, we will contact OFHEO
immediately if the market environment changes markedly and we determine that such changes could limit our
ability to provide liquidity, meet our housing goals, or compete effectively in the secondary mortgage market
while remaining within the portfolio limit prescribed by OFHEO. We anticipate submitting an updated
business plan to OFHEO in early 2007 that will take into account our completed remediation efforts at that
time. The business plan may include a request for modest growth in the mortgage portfolio.
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