Fannie Mae 2005 Annual Report Download - page 301

in February 2005 and required us to achieve the 30% surplus by September 30, 2005. Pursuant to the plan, we
achieved the 30% capital surplus by September 30, 2005 through (i) managing total balance sheet asset size
by reducing the portfolio principally through normal mortgage liquidations in order to limit overall minimum
capital requirements; and (ii) increasing core capital through accreting retained earnings, the December 2004
issuance of $5.0 billion of preferred stock, reducing the common stock dividend by 50%, and cost-cutting
efforts to augment capital accumulation.
Dividend Restrictions
Approval by the Director of OFHEO is required for any dividend payment that would cause either our core
capital or total capital to fall below the minimum capital or risk based capital requirements, respectively.
During the period that we were subject to the OFHEO Agreement (September 27, 2004 to May 22, 2006), we
were subject to additional dividend restrictions as set forth in the agreement. Specifically, as long as we
remained below the 30% capital surplus target, we were required to obtain prior written approval from the
Director of OFHEO before making payment of preferred stock dividends above stated contractual rates or
common stock dividends in excess of the prior quarter’s dividends.
Pursuant to the OFHEO Consent Order (defined below), we are currently subject to the following additional
restrictions relating to our dividends or other capital distributions: (1) as long as the capital restoration plan is
still in effect, we must seek the approval of the Director of OFHEO before engaging in any transaction that
could have the effect of reducing our capital surplus below an amount equal to 30% more than our statutory
minimum capital requirement; and (2) we must submit a written report to OFHEO detailing the rationale and
process for any proposed capital distribution before making the distribution. As of December 31, 2005, our capital
surplus in excess of 30% of our minimum capital requirement that could be considered in the determination of a
capital distribution was $2.7 billion.
During any period in which we defer payment of interest on qualifying subordinated debt, we may not declare
or pay dividends on, or redeem, purchase or acquire, our common stock or preferred stock. Our qualifying
subordinated debt requires us to defer the payment of interest for up to five years if either: (i) our core capital
is below 125% of our critical capital requirement; or (ii) our core capital is below our minimum capital
requirement, and the U.S. Secretary of the Treasury, acting on our request, exercises his or her discretionary
authority pursuant to Section 304(c) of the Charter Act to purchase our debt obligations. To date, no triggering
events have occurred that would require us to defer interest payments on our qualifying subordinated debt.
Compliance with Agreements
On September 1, 2005, we entered into an agreement with OFHEO under which it regulates certain financial
risk management and disclosure commitments designed to enhance market discipline, liquidity and capital
adequacy. Pursuant to this agreement with OFHEO, we agreed to issue qualifying subordinated debt, rated by
at least two nationally recognized statistical rating organizations, in a quantity such that the sum of our total
capital plus the outstanding balance of our qualifying subordinated debt equals or exceeds the sum of:
(i) outstanding Fannie Mae MBS held by third parties times 0.45%; and (ii) total on-balance sheet assets times
4%. We must also take reasonable steps to maintain sufficient outstanding subordinated debt to promote
liquidity and reliable market quotes on market values. Every six months, commencing January 1, 2006, we are
required to submit, and have submitted, to OFHEO a subordinated debt management plan that includes any
issuance plans for the upcoming six months, which is subject to OFHEO’s approval and is required to comply
with our commitment regarding qualifying subordinated debt issuance requirements. In addition, we are
required to provide periodic public disclosures on our risks and risk management practices and will inform
OFHEO of the disclosures. These disclosures include: subordinated debt disclosures, liquidity management
disclosures, interest rate risk disclosures, credit risk disclosures and risk rating disclosures.
On May 23, 2006, we agreed to the issuance of a consent order by OFHEO (the “OFHEO Consent Order”),
which superseded and terminated the OFHEO Agreement and resolved all matters addressed by OFHEO’s
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)