Fannie Mae 2004 Annual Report Download - page 9

Limitation on the Size of Our Mortgage Portfolio. As part of OFHEO’s May 2006 consent order, we agreed
not to increase the size of our net mortgage portfolio above the $727.75 billion amount of net mortgage assets
held as of December 31, 2005, except in limited circumstances at OFHEO’s discretion. Our “net mortgage
assets” refers to the unpaid principal balance of our mortgage assets, net of GAAP adjustments. The consent
order permitted us to propose increases in the size of our mortgage portfolio in a business plan submitted to
OFHEO by July 2006. We may also propose to OFHEO increases in the size of our portfolio to respond to
disruptions in the mortgage markets. The business plan we submitted to OFHEO in July 2006 did not request
an increase in the current limitation on the size of our mortgage portfolio during 2006. We anticipate
submitting an updated business plan to OFHEO in early 2007 that may include a request for modest growth in
our mortgage portfolio. Until the Director of OFHEO has determined that modification or expiration of the
limitation is appropriate, we will remain subject to this limitation on portfolio growth.
SEC Investigation and Settlement. The SEC initiated an investigation of our accounting practices and, in
May 2006, without admitting or denying the SEC’s allegations, we consented to the entry of a final judgment
which resolved all of the SEC’s claims against us in its civil proceeding. The judgment permanently restrains
and enjoins us from future violations of specified provisions of the federal securities laws. In addition, as
discussed under “OFHEO Final Report and Settlement” above, as part of our settlements with OFHEO and the
SEC, we have paid a $400 million civil penalty, with $50 million paid to the U.S. Treasury and $350 million
paid to the SEC for distribution to stockholders pursuant to the Fair Funds for Investors provision of the
Sarbanes-Oxley Act of 2002.
Investigation by the U.S. Attorney’s Office. In October 2004, the U.S. Attorney’s Office for the District of
Columbia notified us that it was investigating our past accounting practices. In August 2006, the
U.S. Attorney’s Office advised us that it had discontinued its investigation and would not be filing any charges
against us.
Stockholder Lawsuits and Other Litigation. A number of lawsuits related to our accounting practices prior to
December 2004 are currently pending against us and certain of our current and former officers and directors.
For more information on these lawsuits, see “Item 3—Legal Proceedings.”
Impairment Determination. On December 6, 2006, the Audit Committee of our Board of Directors reviewed
the conclusion of our Chief Financial Officer and our Controller that we are required under GAAP to take the
impairment charges described in this Annual Report on Form 10-K for the periods presented in this report and,
following discussion with our independent registered public accounting firm, the Audit Committee affirmed that
material impairments have occurred. Additional information relating to the impairment charges, including the
amounts of the impairment charges and our estimates of the amounts of the impairment charges that we expect
to result in future cash expenditures, are discussed in “Item 7—MD&A—Restatement—Summary of Restatement
Adjustments.”
RESIDENTIAL MORTGAGE MARKET OVERVIEW
Residential Mortgage Debt Outstanding
Our business operates within the U.S. residential mortgage market. Because we support activity in the
U.S. residential mortgage market, we consider the amount of U.S. residential mortgage debt outstanding to be
the best measure of the size of our overall market. As of June 30, 2006, the latest date for which information
was available, the amount of U.S. residential mortgage debt outstanding was estimated by the Federal Reserve
to be approximately $10.5 trillion. Our book of business, which includes mortgage assets we hold in our
mortgage portfolio and our Fannie Mae mortgage-backed securities held by third parties, was $2.4 trillion as
of June 30, 2006, or nearly 23% of total U.S. residential mortgage debt outstanding. “Fannie Mae mortgage-
backed securities” or “Fannie Mae MBS” generally refers to those mortgage-related securities that we issue
and with respect to which we guarantee to the related trusts that we will supplement mortgage loan collections
as required to permit timely payment of principal and interest due on these Fannie Mae MBS. We also issue
some forms of mortgage-related securities for which we do not provide this guaranty.
The mortgage market has experienced strong long-term growth. According to Federal Reserve estimates, total
U.S. residential mortgage debt outstanding has increased each year from 1945 to 2005. Growth in U.S.
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