Fannie Mae 2004 Annual Report Download - page 35

addition, the 1992 Act capital requirements include a risk-based capital requirement that is calculated as the
amount of capital needed to withstand a severe ten-year stress period in which it is assumed that there would
simultaneously be extreme movements in interest rates and severe credit losses. Moreover, to allow for
management and operations risks, an additional 30% is added to the amount necessary to withstand the ten-
year stress period. On a quarterly basis, we are required by regulation to report to OFHEO on the level of our
capital and whether we are in compliance with the capital requirements established by OFHEO. We also
provide monthly reports to OFHEO on the level of our capital and our compliance with the capital
requirements.
Compliance with the capital requirements could limit our operations that require intensive use of capital and
could restrict our ability to make payments on our qualifying subordinated debt or pay dividends on our
preferred and common stock. If we fail to meet our capital requirements, OFHEO is permitted or required,
depending on the requirement we fail to meet, to take remedial actions. Further, if we fail to meet our capital
requirements, we are required to submit a capital restoration plan. We currently operate under a capital
restoration plan, described below, that OFHEO approved in February 2005. In addition, if OFHEO determines
that we are engaging in conduct not approved by OFHEO’s Director that could result in a rapid depletion of
our core capital, or that the value of the property securing mortgage loans we hold or have securitized has
decreased significantly, or if OFHEO does not approve the capital restoration plan or determines that we have
failed to make reasonable efforts to comply with the plan, then OFHEO may take remedial measures as if we
were not meeting the capital requirements that we otherwise meet.
The 1992 Act gives OFHEO the authority, after following prescribed procedures, to appoint a conservator.
Under OFHEO’s regulations, appointment of a conservator is mandatory, with limited exceptions, if we are
critically undercapitalized (that is, our core capital is less than our critical capital). Appointment of a
conservator is discretionary under OFHEO’s rules if we are significantly undercapitalized (that is, our core
capital is less than our required minimum capital), and alternative remedies are unavailable. The 1992 Act and
OFHEO’s rules also specify other grounds for appointing a conservator.
In December 2004, OFHEO determined that we were significantly undercapitalized as of September 30, 2004.
We prepared a capital restoration plan to comply with OFHEO’s directive that we achieve a 30% surplus over
our statutory minimum capital requirement by September 30, 2005. Our plan was accepted by OFHEO in
February 2005 and, in accordance with the plan, we increased our capital in 2005 by:
• generating capital through retained earnings;
• significantly reducing the size of our mortgage portfolio, which reduced our overall minimum capital
requirements;
• issuing $5.0 billion in non-cumulative preferred stock in December 2004;
• reducing our quarterly common stock dividend from $0.52 per share to $0.26 per share; and
• canceling our plans to build major new corporate facilities in Southwest Washington, DC and undertaking
other cost-cutting efforts.
OFHEO announced on November 1, 2005 that we had achieved a 30% surplus over our minimum capital
requirement as of September 30, 2005. Under our May 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. For additional information on our
capital requirements, see “Item 7—MD&A—Liquidity and Capital Management—Capital Management—
Capital Adequacy Requirements.”
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