Fannie Mae 2004 Annual Report Download - page 34

reducing our ability to purchase and securitize mortgage loans that meet the HUD subgoals. The National
Association of REALTORS»(“NAR”) housing affordability index has dropped from 130.7 in 2003 to 99.6 in
July of 2006—the lowest level of affordability seen in the market since 1986. If our efforts to meet the new
housing goals and subgoals prove to be insufficient, we may need to take additional steps that could increase
our credit losses and reduce our profitability. See “Item 1A—Risk Factors” for more information on how
changes we are making to our business strategies in order to meet HUD’s new housing goals and subgoals
may reduce our profitability.
OFHEO Regulation
OFHEO is an independent office within HUD that is responsible for ensuring that we are adequately
capitalized and operating safely in accordance with the 1992 Act. We are required to submit to OFHEO annual
and quarterly reports on our financial condition and results of operations. OFHEO is authorized to levy annual
assessments on Fannie Mae and Freddie Mac, to the extent authorized by Congress, to cover OFHEO’s
reasonable expenses. OFHEO’s formal enforcement powers include the power to impose temporary and final
cease-and-desist orders and civil monetary penalties on us and our directors and executive officers. OFHEO
also may use other informal supervisory procedures of the type that are generally used by federal bank
regulatory agencies.
OFHEO Special Examination
In 2003, OFHEO commenced a special examination of our accounting policies and practices, internal controls,
financial reporting, corporate governance, and other matters. In its September 2004 interim report and May
2006 final report of the findings of its special examination, OFHEO concluded that, during the period covered
by the reports (1998 to mid-2004), a large number of our accounting policies and practices did not comply
with GAAP and we had serious problems in our internal controls, financial reporting and corporate
governance. We entered into agreements with OFHEO in September 2004 and March 2005 pursuant to which
we agreed to take specified corrective actions to address the concerns and issues that OFHEO raised in its
examination.
On May 23, 2006, concurrently with OFHEO’s release of its final report, we agreed to OFHEO’s issuance of a
consent order without admitting or denying any wrongdoing or any asserted or implied finding or other basis
for the consent order. This consent order superseded and terminated both our September 2004 and March 2005
agreements with OFHEO, and resolved all matters addressed by OFHEO’s interim and final reports of its
special examination. Under this consent order, we agreed to undertake specified remedial actions to address
the recommendations contained in OFHEO’s May 2006 report, including actions relating to our corporate
governance, Board of Directors, capital plans, internal controls, accounting practices, public disclosures,
regulatory reporting, personnel and compensation practices. We also agreed not to increase our net mortgage
assets above the amount shown in our minimum capital report to OFHEO for December 31, 2005
($727.75 billion), except in limited circumstances at OFHEO’s discretion. Given our need to remediate our
identified control deficiencies, the business plan we submitted to OFHEO in July 2006 did not request an
increase in the current limitation on the size of our mortgage portfolio during 2006. We anticipate submitting
an updated business plan to OFHEO in early 2007 that will take into account our remediation efforts
completed at that time. The business plan may include a request for modest growth in our mortgage portfolio.
As part of this consent order and our settlement with the SEC discussed below, we agreed to pay a
$400 million civil penalty, with $50 million payable to the U.S. Treasury and $350 million payable to the SEC
for distribution to stockholders pursuant to the Fair Funds for Investors provision of the Sarbanes-Oxley Act of
2002. We have paid this civil penalty in full and it has been recorded as an expense in our 2004 consolidated
financial statements.
Capital Requirements
As part of its responsibilities under the 1992 Act, OFHEO has regulatory authority as to the capital
requirements established by the 1992 Act, issuing regulations on capital adequacy and enforcing capital
standards. The 1992 Act capital requirements include minimum and critical capital requirements calculated as
specified percentages of our assets and our off-balance sheet obligations, such as outstanding guaranties. In
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