Fannie Mae 2005 Annual Report Download - page 32

The 1992 Act gives OFHEO the authority, after following prescribed procedures, to appoint a conservator.
Under OFHEO’s regulations, appointment of a conservator is mandatory, with limited exceptions, if we are
critically undercapitalized (that is, our core capital is less than our required critical capital). Appointment of a
conservator is discretionary under OFHEO’s rules if we are significantly undercapitalized (that is, our core
capital is less than our required minimum capital), and alternative remedies are unavailable. The 1992 Act and
OFHEO’s rules also specify other grounds for appointing a conservator.
In December 2004, OFHEO determined that we were significantly undercapitalized as of September 30, 2004.
We submitted, and in February 2005, OFHEO approved, a capital restoration plan intended to comply with
OFHEO’s directive that we achieve a 30% surplus over our statutory minimum capital requirement by
September 30, 2005. OFHEO announced on November 1, 2005 that we had achieved a 30% surplus over our
minimum capital requirement as of September 30, 2005. Under our May 2006 consent order with OFHEO, we
agreed to continue to maintain a 30% capital surplus over our statutory minimum capital requirement until the
Director of OFHEO, in his discretion, determines the requirement should be modified or allowed to expire,
taking into account factors such as resolution of accounting and internal control issues. For additional
information on our capital requirements, see “Item 7—MD&A—Liquidity and Capital Management—Capital
Management—Capital Adequacy Requirements.”
Dividend Restrictions
Our capital requirements under the 1992 Act and as administered by OFHEO may restrict the ability of our
Board of Directors to declare dividends, authorize repurchases of our preferred or common stock, or approve
any other capital distributions. If such an action would decrease our total capital below the risk-based capital
requirement or our core capital below the minimum capital requirement, we may not make the distribution
without the approval of OFHEO.
In addition, under our May 2006 consent order with OFHEO, we agreed to the following additional restrictions
relating to our capital distributions:
• as long as the capital restoration plan is 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
• we must submit a written report to OFHEO detailing the rationale and process for any proposed capital
distribution before making the distribution.
Refer to “Item 7—MD&A—Liquidity and Capital Management—Capital Management—Capital Adequacy
Requirements” for a description of our statutory capital requirements and our core capital, total capital and
other capital classification measures as of December 31, 2005 and 2004.
Recent Legislative Developments and Possible Changes in Our Regulations
The U.S. Congress continues to consider legislation that would change the regulatory framework under which
we, Freddie Mac and the Federal Home Loan Banks operate. On March 29, 2007, the House Financial
Services Committee approved a bill that would establish a new, independent regulator for us and the other
GSEs, with broad authority over both safety and soundness and mission. The bill, if enacted into law, would
affect Fannie Mae in significant ways, including:
• authorizing the regulator to limit the size and composition of our mortgage investment portfolio;
• authorizing the regulator to increase the level of our required capital;
• changing the approval process for products and activities and expanding the extent of regulatory oversight
of us and our officers, directors and employees;
• changing the method for enforcing compliance with housing goals; and
• authorizing, and in some instances requiring, the appointment of a receiver if the company becomes
critically undercapitalized.
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