Fannie Mae 2005 Annual Report Download - page 50

regulatory requirements or exercise regulatory authority over our business beyond current practices, and any of
these changes could have a material adverse effect on our business and earnings. For example, in the late
summer of 2006, HUD commenced a review of specified investments and holdings to determine whether our
investment activities are consistent with our charter authority. We cannot predict the outcome of this review,
which currently is ongoing, or whether HUD will seek to restrict our current business activities as a result of
this or other reviews.
To meet HUD’s new housing goals and subgoals, we enter into transactions that may reduce our
profitability.
HUD has established housing goals and subgoals for our business. HUD’s housing goals require that a
specified portion of our business relate to the purchase or securitization of mortgage loans that finance housing
for low- and moderate-income households, housing in underserved areas and qualified housing under the
definition of special affordable housing. HUD has increased our housing goals for 2005 through 2008, and has
created new purchase money mortgage subgoals effective beginning in 2005 that also increase over the 2005
to 2008 period. These changes in our housing goals and subgoals, together with increases in home prices and
a decrease in our share of the secondary mortgage market in recent years, have made it increasingly
challenging to meet our housing goals and subgoals.
As a result, meeting the increased housing goals and subgoals established by HUD for 2007 and future years
may reduce our profitability. In order to obtain business that contributes to our new housing goals and
subgoals, we have made, and continue to make, significant adjustments to our mortgage loan sourcing and
purchase strategies. These strategies include entering into some purchase and securitization transactions with
lower expected economic returns than our typical transactions. We have also relaxed some of our underwriting
criteria to obtain goals-qualifying mortgage loans and increased our investments in higher-risk mortgage loan
products that are more likely to serve the borrowers targeted by HUD’s goals and subgoals, which could
increase our credit losses.
The specific housing goals and subgoals levels for 2005 through 2008, as well as our performance against
these goals in 2005 and 2006, are described in “Item 1—Business—Our Charter and Regulation of Our
Activities—Regulation and Oversight of Our Activities—HUD Regulation—Housing Goals.” Several of HUD’s
housing goals and subgoals increase in 2007. Accordingly, it is possible that we may not meet one or more of
our 2007 housing goals or subgoals. Meeting the higher subgoals for 2007 is particularly challenging because
increased home prices and higher interest rates have reduced housing affordability during the past several
years. Since HUD set the home purchase subgoals in 2004, the affordable housing markets have experienced a
dramatic change. Home Mortgage Disclosure Act data released in 2006 show that the share of the primary
mortgage market serving low- and moderate-income borrowers declined in 2005, reducing our ability to
purchase and securitize mortgage loans that meet the HUD subgoals. If our efforts to meet the new housing
goals and subgoals in 2007 and future years prove to be insufficient, we may need to take additional steps that
could have an adverse effect on our profitability.
In many cases, our accounting policies and methods, which are fundamental to how we report our financial
condition and results of operations, require management to make estimates and rely on the use of models
about matters that are inherently uncertain.
Our accounting policies and methods are fundamental to how we record and report our financial condition and
results of operations. Our management must exercise judgment in applying many of these accounting policies
and methods so that these policies and methods comply with U.S. generally accepted accounting principles
(“GAAP”) and reflect management’s judgment of the most appropriate manner to report our financial
condition and results of operations. In some cases, management must select the appropriate accounting policy
or method from two or more alternatives, any of which might be reasonable under the circumstances but might
affect the amount of assets, liabilities, revenues and expenses that we report. See “Notes to Consolidated
Financial Statements—Note 1, Summary of Significant Accounting Policies” for a description of our
significant accounting policies.
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