Fannie Mae 2004 Annual Report Download - page 45

control deficiencies could lead to errors in our reported financial results and could have a material adverse
effect on our operations, investor confidence in our business and the trading prices of our securities.
As described in “Item 9A—Controls and Procedures—Remediation Activities and Changes in Internal Control
Over Financial Reporting,” we are currently in the process of remediating our identified material weaknesses;
however, management will not make a final determination that we have completed our remediation of these
material weaknesses until we have completed testing of our newly implemented internal controls. In addition,
we have not filed our Quarterly Reports on Form 10-Q for 2005 or 2006, or our Annual Report on Form 10-K
for 2005, and we are not able at this time to file our periodic SEC reports on Form 10-Q and Form 10-K on a
timely basis. We believe that we will not have remediated the material weakness relating to our disclosure
controls and procedures until we are able to file required reports with the SEC and the New York Stock
Exchange on a timely basis.
In the future, we may identify further material weaknesses or significant deficiencies in our internal control
over financial reporting that we have not discovered to date. In addition, we cannot be certain that we will be
able to maintain adequate controls over our financial processes and reporting in the future.
Competition in the mortgage and financial services industries, and the need to develop, enhance and
implement strategies to adapt to changing trends in the mortgage industry and capital markets, may
adversely affect our business and earnings.
Increasing Competition. We compete to acquire mortgage loans for our mortgage portfolio or for securitiza-
tion based on a number of factors, including our speed and reliability in closing transactions, our products and
services, the liquidity of Fannie Mae MBS, our reputation and our pricing. We face increasing competition in
the secondary mortgage market from other GSEs and from large commercial banks, savings and loan
institutions, securities dealers, investment funds, insurance companies and other financial institutions. In
addition, increasing consolidation within the financial services industry has created larger private financial
institutions, which has increased pricing pressure. The recent decreased rate of growth in U.S. residential
mortgage debt outstanding in 2006 also has increased competition in the secondary mortgage market by
decreasing the number of new mortgage loans available for purchase. This increased competition may
adversely affect our business and earnings.
Potential Decrease in Earnings Resulting from Changes in Industry Trends. The manner in which we
compete and the products for which we compete are affected by changing trends in our industry. If we do not
effectively respond to these trends, or if our strategies to respond to these trends are not as successful as our
prior business strategies, our business, earnings and total returns could be adversely affected. For example, in
recent years, an increasing proportion of single-family mortgage loan originations has consisted of non-
traditional mortgages such as interest-only mortgages, negative-amortizing mortgages and sub-prime
mortgages, and demand for traditional 30-year fixed-rate mortgages has decreased. We did not participate in
large amounts of these non-traditional mortgages in 2004 and 2005 because we determined that the pricing
offered for these mortgages often was insufficient compensation for the additional credit risk associated with
these mortgages. These trends and our decision not to participate in large amounts of these non-traditional
mortgages contributed to a significant loss in our share of new single-family mortgage-related securities
issuances to private-label issuers during this period, with our market share decreasing from 45.0% in 2003 to
29.2% in 2004 and 23.5% in 2005.
We have modified and enhanced a number of our strategies as part of our ongoing efforts to adapt to recent
changes in the industry. For example, our Capital Markets group focused on buying and holding mortgage
assets to maturity prior to 2005. Beginning in 2005, however, in response to both our capital plan requirements
and market conditions at that time, our Capital Markets group engaged in more active management of our
portfolio through both purchases and sales of mortgage assets, with the dual goals of supporting our chartered
purpose of providing liquidity to the secondary mortgage market and maximizing total returns. In addition, we
have been working with our lender customers to support a broad range of mortgage products, including sub-
prime products, while closely monitoring credit risk and pricing dynamics across the full spectrum of mortgage
product types. We may not be able to execute successfully any new or enhanced strategies that we adopt. In
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