Fannie Mae 2005 Annual Report Download - page 48

other consumer financial information. Despite the protective measures we take to reduce the likelihood of
information breaches, this information could be exposed in several ways, including through unauthorized
access to our computer systems, employee error, computer viruses that attack our computer systems, software
or networks, accidental delivery of information to an unauthorized party and loss of unencrypted media
containing this information. Any of these events could result in significant financial losses, legal and regulatory
sanctions, and reputational damage. A description of our risk management programs for mortgage fraud and
information security is included in “Item 7—MD&A—Risk Management—Operational Risk Management.”
We have several key lender customers, and the loss of business volume from any one of these customers
could adversely affect our business, market share and results of operations.
Our ability to generate revenue from the purchase and securitization of mortgage loans depends on our ability
to acquire a steady flow of mortgage loans from the originators of those loans. We acquire a significant
portion of our single-family mortgage loans from several large mortgage lenders. During 2005, our top five
lender customers accounted for approximately 49% and 38% of our single-family and multifamily business
volumes, respectively. In addition, during 2005, our largest lender customer accounted for approximately 25%
of our single-family business volume and 10% of our multifamily business volume, respectively. Accordingly,
maintaining our current business relationships and business volumes with our top lender customers is critical
to our business. If any of our key lender customers significantly reduces the volume of mortgage loans that the
lender delivers to us or that we are willing to buy from them, we could lose significant business volume that
we might be unable to replace. The loss of business from any one of our key lender customers could adversely
affect our business, market share and results of operations. In addition, a significant reduction in the volume of
mortgage loans that we securitize could reduce the liquidity of Fannie Mae MBS, which in turn could have an
adverse effect on their market value.
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, 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 by approximately 20% 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. This reduction in the size of our
mortgage portfolio contributed to a significant reduction in our net interest income for the year ended
December 31, 2005, as compared to the years ended December 31, 2004 and 2003. In addition, we have
incurred significant administrative expenses in connection with complying with our remediation obligations,
resulting in a reduction in our earnings for the year ended December 31, 2005, as compared to the years ended
December 31, 2004 and 2003. We expect this reduction in the size of our mortgage portfolio and higher
administrative expenses to continue to have a negative impact on our earnings in 2006 and 2007. 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
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