Fannie Mae 2004 Annual Report Download - page 178

For information regarding our outstanding long-term debt as of December 31, 2004 and 2003, refer to “Notes
to Consolidated Financial Statements—Note 9, Short-term Borrowings and Long-term Debt.”
We are one of the world’s largest issuers of unsecured debt securities in terms of the amount of unsecured
debt we issue. We issue debt on a regular basis in significant amounts in the capital markets and have a
diversified funding base of domestic and international investors. Purchasers of our debt securities include fund
managers, commercial banks, pension funds, insurance companies, foreign central banks, state and local
governments, and retail investors. Purchasers of our debt securities are also geographically diversified, with a
significant portion of our investors located in the United States, Europe and Asia. The diversity of our debt
investors enhances our financial flexibility and limits our dependence on any one source of funding. Our status
as a GSE and our current “AAA” (or its equivalent) senior long-term unsecured debt credit ratings are critical
to our ability to continuously access the debt capital markets to borrow at attractive rates. The U.S. government
does not guarantee our debt, directly or indirectly, and our debt does not constitute a debt or obligation of the
U.S. government.
Our sources of liquidity have remained adequate to meet both our short-term and long-term funding needs,
and we anticipate that they will remain adequate in 2007. Due to the reduction in the size of our mortgage
portfolio subsequent to December 31, 2004 pursuant to our capital restoration plan, our debt funding
requirements have been lower in 2005 and 2006 than in 2002, 2003 and 2004. As of December 31, 2004, we
had total debt outstanding of $953.1 billion, as compared to total debt outstanding of $753.2 billion as of
September 30, 2006. However, we remain an active issuer of short-term and long-term debt securities. Our
short-term and long-term funding needs during 2007 are generally expected to be consistent with our needs
during 2005 and 2006, and with the uses of cash described above under “Sources and Uses of Cash.” As
described below under “Capital Management—Capital Activity—OFHEO Oversight of Our Capital Activity,”
pursuant to our May 2006 consent order with OFHEO, we are currently not permitted to increase our net
mortgage portfolio assets above the amount shown in our minimum capital report to OFHEO as of
December 31, 2005 ($727.75 billion). We expect that, over the long term, our funding needs and sources of
liquidity will remain relatively consistent with current needs and sources. We may increase our issuance of
debt in future years if we decide to increase our purchase of mortgage assets following the modification or
expiration of the current limitation on the size of our mortgage portfolio.
We have experienced no limitations on our ability to borrow funds through the issuance of debt securities in
the capital markets and do not anticipate any change in our ability to do so in the foreseeable future.
Significant changes in our current regulatory status, however, could adversely affect our access to some or all
debt investors and lead to a reduction in our credit ratings, thereby potentially increasing our debt funding
costs and reducing the amount of debt that we can issue at any given time. Other factors that could negatively
impact our ability to issue debt securities at attractive rates include significant changes in interest rates,
increased interest rate volatility, a significant adverse change in our financial condition or financial results,
significant events relating to our business or industry, a significant change in the public’s perception of the
risks to and financial prospects of our business or our industry, regulatory constraints, disruptions in the capital
markets and general economic conditions in the United States or abroad. Refer to “Item 1A—Risk Factors”
for a discussion of the risks relating to our ability to issue debt in sufficient quantities and at attractive rates,
the risks associated with a reduction in our current credit ratings and the risks associated with proposed
changes in the regulation of our business. On June 13, 2006, the U.S. Department of the Treasury announced
that it would undertake a review of its process for approving our issuances of debt, which could adversely
impact our flexibility in issuing debt securities in the future. We cannot predict whether the outcome of this
review will materially impact our current debt issuance activities.
Change in the Federal Reserve Board’s Payments System Risk Policy
On July 20, 2006, the Federal Reserve Banks implemented changes to the Federal Reserve Board’s “Policy
Statement on Payments System Risk.” The changes pertain to the processing of principal and interest payments,
via the Fedwire system, for securities issued by GSEs and certain international organizations, including us.
Prior to July 2006, the Federal Reserve Bank exempted us from overdraft fees relating to the processing of
interest and redemption payments on our debt and Fannie Mae MBS. We were permitted to overdraw our
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