Fannie Mae 2004 Annual Report Download - page 44

and Capital Management—Capital Management—Capital Adequacy Requirements—Statutory Risk-Based
Capital Requirements” for a detailed definition of our statutory risk-based capital requirement.
“Secondary mortgage market” refers to the financial market in which residential mortgages and mortgage-
related securities are bought and sold.
“Single-family” mortgage loan refers to a mortgage loan secured by a property containing four or fewer
residential dwelling units.
“Single-family mortgage credit book of business” refers to the sum of the unpaid principal balance of: (1) the
single-family mortgage loans we hold in our investment portfolio; (2) the Fannie Mae MBS and non-Fannie
Mae mortgage-related securities backed by single-family mortgage loans we hold in our investment portfolio;
(3) Fannie Mae MBS backed by single-family mortgage loans that are held by third parties; and (4) credit
enhancements that we provide on single-family mortgage assets.
“Sub-prime mortgage” refers to a mortgage loan underwritten using lower credit standards than those used in
the prime lending market.
“Swaptions” refers to options on interest rate swaps in the form of contracts granting an option to one party
and creating a corresponding commitment from the counterparty to enter into specified interest rate swaps in
the future. Swaptions are usually traded in the over-the-counter market and not through an exchange.
“Total capital” refers to a regulatory measure of our capital that represents the sum of core capital plus the
total allowance for loan losses and reserve for guaranty losses in connection with Fannie Mae MBS, less the
specific loss allowance (that is, the allowance required on individually-impaired loans).
“Yield curve” or “shape of the yield curve” refers to a graph showing the relationship between the yields on
bonds of the same credit quality with different maturities. For example, a “normal” or positive sloping yield
curve exists when long-term bonds have higher yields than short-term bonds. A “flat” yield curve exists when
yields are relatively the same for short-term and long-term bonds. A “steep” yield curve exists when yields on
long-term bonds are significantly higher than on short-term bonds. An “inverted” yield curve, which is rare,
exists when yields on long-term bonds are lower than yields on short-term bonds.
Item 1A. Risk Factors
This section identifies specific risks that should be considered carefully in evaluating our business. The risks
described in “Company Risks” are specific to us and our business, while those described in “Risks Relating to
Our Industry” relate to the industry in which we operate. Any of these risks could adversely affect our
business, results of operations or financial condition. Although we believe that these risks represent the
material risks relevant to us, our business and our industry, new material risks may emerge that we are
currently unable to predict. As a result, this description of the risks that affect our business and our industry is
not exhaustive. The risks discussed below could cause our actual results to differ materially from our historical
results or the results contemplated by the forward-looking statements contained in this report.
COMPANY RISKS
Material weaknesses and other control deficiencies relating to our internal controls could result in errors in
our reported results and could have a material adverse effect on our operations, investor confidence in our
business and the trading prices of our securities.
Management’s assessment of our internal control over financial reporting as of December 31, 2004 identified
numerous material weaknesses in our control environment, our application of GAAP, our financial reporting
process, and our information technology applications and infrastructure as of December 31, 2004. Further, we
identified additional material weaknesses in the independent model review process, treasury and trading
operations, pricing and independent price verification processes, and wire transfer controls. In addition,
following their separate investigations of our business and accounting practices, OFHEO and the law firm of
Paul Weiss each issued reports identifying significant problems and deficiencies in our prior processes for
corporate governance and internal controls. Until they are remediated, these material weaknesses and other
39