Fannie Mae 2006 Annual Report Download - page 42

The consent order also prohibits our Board of Directors from increasing the dividend at any time if payment
of the increased dividend would reduce our capital surplus to less than the OFHEO-directed minimum capital
requirement. In addition, the OFHEO consent order requires us to provide OFHEO with prior notice of any
planned dividend and a description of the rationale for its payment.
If we fail to comply with any of our agreements with OFHEO or with any OFHEO regulation, including those
relating to our minimum, core, risk-based or OFHEO-directed capital, 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 could adversely affect our results of operations. HUD
supervises our compliance with the Charter Act, which defines our permissible business activities. For
example, we may not purchase single-family loans in excess of our conforming loan limits, which are set
annually based on U.S. home prices. The conforming loan limit for a one-family mortgage loan in most
geographic regions is currently $417,000. In addition, under the Charter Act, our business is limited to the
U.S. housing finance sector. As a result of these limitations on our ability to diversify our operations, our
financial condition and earnings depend almost entirely on conditions in a single sector of the U.S. economy,
specifically, the U.S. housing market. Our substantial reliance on conditions in the U.S. housing market may
adversely affect the investment returns we are able to generate. In addition, the Secretary of HUD must
approve any new Fannie Mae conventional mortgage program that is significantly different from those
approved or engaged in prior to the enactment of the 1992 Act. As a result, our ability to respond quickly to
changes in market conditions by offering new programs in response to these changes is subject to HUD’s prior
approval process. These restrictions on our business operations may negatively affect our ability to compete
successfully with other companies in the mortgage industry from time to time, which in turn may reduce our
market share, our earnings and our financial condition.
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 through 2008, and has
created purchase money mortgage subgoals that also increase through 2008. These changes in our housing
goals and subgoals and declining affordability have made it increasingly challenging to meet our housing
goals and subgoals. If we do not meet any enforceable housing goal or subgoal, we may become subject to
increased HUD oversight for the following year or be subject to civil money penalties.
Our efforts to meet 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 housing goals and subgoals, we
have made 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 further increase our credit losses.
A decrease in our current credit ratings would have an adverse effect on our ability to issue debt on
acceptable terms, which would reduce our liquidity and our earnings.
Our borrowing costs and our broad access to the debt capital markets depend in large part on our high credit
ratings, particularly on our senior unsecured debt. Our ratings are subject to revision or withdrawal at any time
by the rating agencies. Any reduction in our credit ratings could increase our borrowing costs, limit our access
to the capital markets and trigger additional collateral requirements in derivative contracts and other borrowing
arrangements. A substantial reduction in our credit ratings would reduce our earnings and materially adversely
affect our liquidity, our ability to conduct our normal business operations and our competitive position. A
description of our credit ratings and current ratings outlook is included in “Item 7—MD&A—Liquidity and
Capital Management—Liquidity—Credit Ratings and Risk Ratings.”
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