Fannie Mae 2004 Annual Report Download - page 339

During the period that we were subject to the OFHEO Agreement (September 27, 2004 to May 22, 2006), we
were required to obtain prior written approval from the Director of OFHEO before the payment of preferred
stock dividends above stated contractual rates or, until we reached the targeted capital surplus, the payment of
common stock dividends in excess of the prior quarter’s dividends. We must submit a written report to the
Director of OFHEO after the declaration, but before the payment, of any dividend on our common stock. The
report shall contain specific information on the amount of the dividend, the rationale for the payment and the
impact on the required capital surplus.
During any period in which we defer payment of interest on qualifying subordinated debt, we may not declare
or pay dividends on, or redeem, purchase or acquire, our common stock or preferred stock. Our qualifying
subordinated debt requires us to defer the payment of interest for up to five years if either: (i) our core capital
is below 125% of our critical capital requirement; or (ii) our core capital is below our minimum capital
requirement, and the U.S. Secretary of the Treasury, acting on our request, exercises his or her discretionary
authority pursuant to Section 304(c) of the Charter Act to purchase our debt obligations. To date, no triggering
events have occurred that would require us to defer interest payments on our qualifying subordinated debt.
Compliance with Agreements
OFHEO has classified us as adequately capitalized as of March 31, 2005 and for all quarterly periods
thereafter through June 30, 2006. In addition, OFHEO announced on November 1, 2005 that we achieved the
30% surplus over minimum capital as of September 30, 2005, as required by OFHEO. Because we have not
yet prepared audited financial statements for any period after December 31, 2004, OFHEO’s capital
classifications for periods after December 31, 2004 are based on our estimates of our financial condition as of
such periods and remain subject to revision.
On September 1, 2005, we entered into an agreement with OFHEO under which it regulates certain financial
risk management and disclosure commitments designed to enhance market discipline, liquidity and capital.
Pursuant to this agreement with OFHEO, we agreed to issue qualifying subordinated debt, rated by at least
two nationally recognized statistical rating organizations, in a quantity such that the sum of our total capital
plus the outstanding balance of our qualifying subordinated debt equals or exceeds the sum of: (i) outstanding
Fannie Mae MBS held by third parties times 0.45%; and (ii) total on-balance sheet assets times 4%. We must
also take reasonable steps to maintain sufficient outstanding subordinated debt to promote liquidity and
reliable market quotes on market values. Every six months, commencing January 1, 2006, we are required to
submit, and have submitted, to OFHEO a subordinated debt management plan that includes any issuance plans
for the upcoming six months, which is subject to OFHEO’s approval and is required to comply with our
commitment regarding qualifying subordinated debt issuance requirements. In addition, we are required to
provide periodic public disclosures on our risks and risk management practices and will inform OFHEO of the
disclosures. These disclosures include: subordinated debt disclosures, liquidity management disclosures,
interest rate risk disclosures, credit risk disclosures and risk rating disclosures.
On May 23, 2006, we agreed to the issuance of a consent order by OFHEO (the “OFHEO Consent Order”),
which superseded and terminated the OFHEO Agreement and resolved all matters addressed by OFHEO’s
interim and final reports of its special examination. According to the OFHEO Consent Order, we agreed to the
following restrictions relating to our capital activity in addition to the restrictions set forth in the Charter Act:
• We must continue our commitment to maintain a 30% capital surplus over our statutory minimum capital
requirement until such time as the Director of OFHEO determines that the requirement should be
modified or expire, considering factors such as resolution of accounting and internal control issues.
• While the capital restoration plan is in effect, we must seek the approval of the Director of OFHEO
before engaging in any transaction that could have the effect of reducing our capital surplus below an
amount equal to 30% more than our statutory minimum capital requirement.
• We must submit a written report to OFHEO detailing the rationale and process for any proposed capital
distribution before making the distribution.
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FANNIE MAE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)