Fannie Mae 2004 Annual Report Download - page 50

downturns in the countries where these investors are located, currency exchange rates and changes in domestic
or foreign fiscal or monetary policies, are outside our control.
If we are unable to issue debt securities at attractive rates in amounts sufficient to operate our business and
meet our obligations, it would have a material adverse effect on our liquidity, financial condition and results of
operations. A description of how we obtain funding for our business by issuing debt securities in the capital
markets is contained in “Item 7—MD&A—Liquidity and Capital Management—Liquidity—Debt Funding.”
For a description of how we manage liquidity risk, see ‘‘Item 7—MD&A—Liquidity and Capital
Management—Liquidity—Liquidity Risk Management.”
On June 13, 2006, the U.S. Department of the Treasury announced that it would undertake a review of its
process for approving our issuances of debt, which could adversely impact our flexibility in issuing debt
securities in the future. We cannot predict whether the outcome of this review will materially impact our
current business activities.
A decrease in our current credit ratings would have an adverse effect on our ability to issue debt on accept-
able terms, which could adversely affect our liquidity and our results of operations.
Our borrowing costs and our broad access to the debt capital markets depends in large part on our high credit
ratings. Our senior unsecured debt currently has the highest credit rating available from Moody’s Investors
Service (“Moody’s”), Standard & Poor’s, a division of The McGraw-Hill Companies (“Standard & Poor’s”),
and Fitch Ratings (“Fitch”). These ratings are subject to revision or withdrawal at any time by the rating
agencies. Any reduction in our credit ratings could increase our borrowing costs, limit our access to the capital
markets and trigger additional collateral requirements in derivative contracts and other borrowing arrange-
ments. A substantial reduction in our credit ratings would reduce our earnings and materially adversely affect
our liquidity, our ability to conduct our normal business operations and our competitive position. A description
of our credit ratings and current ratings outlook is included in “Item 7—MD&A—Liquidity and Capital
Management—Liquidity—Credit Ratings and Risk Ratings.”
Our business is subject to laws and regulations that may restrict our ability to compete optimally. In addition,
legislation that would change the regulation of our business could, if enacted, reduce our competitiveness and
adversely affect our results of operations and financial condition. The impact of existing regulation on our
business is significant, and both existing and future regulation may adversely affect our business.
As a federally chartered corporation, we are subject to the limitations imposed by the Charter Act, extensive
regulation, supervision and examination by OFHEO and HUD, and regulation by other federal agencies, such
as the U.S. Department of the Treasury and the SEC. We are also subject to many laws and regulations that
affect our business, including those regarding taxation and privacy. A description of the laws and regulations
that affect our business is contained in “Item 1—Business—Our Charter and Regulation of Our Activities.”
Regulation by OFHEO. OFHEO has broad authority to regulate our operations and management in order to
ensure our financial safety and soundness. For example, in order to meet our capital plan requirements in
2005, we were required to make significant changes to our business in 2005, including reducing the size of
our mortgage portfolio and reducing our quarterly common stock dividend by 50%. Pursuant to our May 2006
consent order with OFHEO, we may not increase our net mortgage portfolio assets above $727.75 billion,
except in limited circumstances at OFHEO’s discretion. We expect that this reduction in the size of our
mortgage portfolio beginning in 2005 will contribute to significantly reduced net interest income for the years
ended December 31, 2005 and 2006, as compared to the years ended December 31, 2004 and 2003. In
addition, we have incurred and expect to continue to incur significant administrative expenses in connection
with complying with our remediation obligations, which will reduce our earnings for the years ended
December 31, 2005 and 2006. If we fail to comply with any of our agreements with OFHEO or with any
OFHEO regulation, we may incur penalties and could be subject to further restrictions on our activities and
operations, or to investigation and enforcement actions by OFHEO.
Regulation by HUD and Charter Act Limitations. HUD supervises our compliance with the Charter Act,
which defines our permissible business activities. For example, our business is limited to the U.S. housing
finance sector and we may not purchase loans in excess of our conforming loan limits, which are currently
$417,000 for a one-family mortgage loan in most geographic regions and may be lower in future periods
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