Fannie Mae 2004 Annual Report Download - page 54

We are subject to pending civil litigation that, if decided against us, could require us to pay substantial
judgments, settlements or other penalties.
A number of lawsuits have been filed against us and certain of our current and former officers and directors
relating to our accounting restatement. These suits are currently pending in the U.S. District Court for the
District of Columbia and fall within three primary categories: a consolidated shareholder class action lawsuit,
a consolidated shareholder derivative lawsuit and a consolidated Employee Retirement Income Security Act of
1974 (“ERISA”)-based class action lawsuit. We may be required to pay substantial judgments, settlements or
other penalties and incur significant expenses in connection with the consolidated shareholder class action and
consolidated ERISA-based class action, which could have a material adverse effect on our business, results of
operations and cash flows. In addition, our current and former directors, officers and employees may be
entitled to reimbursement for the costs and expenses of these lawsuits pursuant to our indemnification
obligations with those persons. We are also a party to several other lawsuits that, if decided against us, could
require us to pay substantial judgments, settlements or other penalties. These include a proposed class action
lawsuit alleging violations of federal and state antitrust laws and state consumer protection laws in connection
with the setting of our guaranty fees and a proposed class action lawsuit alleging that we violated purported
fiduciary duties with respect to certain escrow accounts for FHA-insured multifamily mortgage loans. We are
unable at this time to estimate our potential liability in these matters. We expect all of these lawsuits to be
time-consuming, and they may divert management’s attention and resources from our ordinary business
operations. More information regarding these lawsuits is included in “Item 3—Legal Proceedings” and “Notes
to Consolidated Financial Statements—Note 20, Commitments and Contingencies.”
RISKS RELATING TO OUR INDUSTRY
Changes in general market and economic conditions in the United States and abroad may adversely affect
our financial condition and results of operations.
Our financial condition and results of operations may be adversely affected by changes in general market and
economic conditions in the United States and abroad. These conditions include short-term and long-term
interest rates, the value of the U.S. dollar as compared to foreign currencies, fluctuations in both the debt and
equity capital markets, employment rates and the strength of the U.S. national economy and local economies.
These conditions are beyond our control, and may change suddenly and dramatically.
Changes in market and economic conditions could adversely affect us in many ways, including the following:
• fluctuations in the global debt and equity capital markets, including sudden and unexpected changes in
short-term or long-term interest rates, could decrease the fair value of our mortgage assets, derivatives
positions and other investments, negatively affect our ability to issue debt at attractive rates, and reduce
our net interest income; and
• an economic downturn or rising unemployment in the United States could decrease homeowner demand
for mortgage loans and increase the number of homeowners who become delinquent or default on their
mortgage loans. An increase in delinquencies or defaults would likely result in a higher level of credit
losses, which would adversely affect our earnings. Also, decreased homeowner demand for mortgage
loans could reduce our guaranty fee income, net interest income and the fair value of our mortgage assets.
An economic downturn could also increase the risk that our counterparties will default on their obligations
to us, increasing our liabilities and reducing our earnings.
A decline in U.S. housing prices or in activity in the U.S. housing market could negatively impact our
earnings and financial condition.
U.S. housing prices have risen significantly in recent years. As described above, this period of extraordinary
home price appreciation appears to be ending. The rate of home price appreciation has slowed and we believe
there is a possibility of a modest decline in national home prices in 2007. Declines in housing prices could result
in increased delinquencies or defaults on the mortgage loans we own or that back our guaranteed Fannie Mae
MBS. An increase in delinquencies or defaults would likely result in a higher level of credit losses, which would
adversely affect our earnings. In addition, housing price declines would reduce the fair value of our mortgage
assets.
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