Fannie Mae 2007 Annual Report Download - page 136

(5)
Generally, the sum of (a) 1.25% of on-balance sheet assets; (b) 0.25% of the unpaid principal balance of outstanding
Fannie Mae MBS held by third parties and (c) up to 0.25% of other off-balance sheet obligations, which may be
adjusted by the Director of OFHEO under certain circumstances.
(6)
The sum of (a) core capital and (b) the total allowance for loan losses and reserve for guaranty losses, less (c) the
specific loss allowance (that is, the allowance required on individually-impaired loans). The specific loss allowance
totaled $106 million as of both December 31, 2007 and 2006.
In addition, our total capital was $48.7 billion as of December 31, 2007, a surplus of $24.0 billion, or 97%,
over our estimated statutory-risk based capital requirement of $24.7 billion for the period. Our total capital
was $42.7 billion as of December 31, 2006, a surplus of $15.8 billion, or 58.9%, over our statutory risk-based
capital requirement of $26.9 billion for the period. Our statutory risk-based capital requirement is likely to
increase following the implementation of OFHEO’s proposed change to certain formulas used in calculating
the requirement. For a description of OFHEO’s proposed rule change, see “Part I—Item 1—Business—Our
Charter and Regulation of Our Activities—Regulation of Our Activities—OFHEO Regulation—Capital
Adequacy Requirements.”
All capital classification measures as of December 31, 2007 provided in this report represent estimates that
will be submitted to OFHEO for its certification and are subject to its review and approval. They do not
represent OFHEO’s announced capital classification measures.
For each quarter of 2006 and the first three quarters of 2007, we have been classified by OFHEO as
adequately capitalized. Based on financial results that we provided to OFHEO, it announced on December 27,
2007 that we were classified as adequately capitalized as of September 30, 2007 (the most recent quarter for
which OFHEO has published its capital classification).
Capital Activity
Capital Management Actions
As described in “Consolidated Results of Operations” above, we recorded a net loss in 2007. Because our
retained earnings are a component of our core capital, this loss reduced the amount of our core capital. To
maintain sufficient capital levels, we have taken several capital management actions, including: issuing a total
of $8.9 billion in preferred stock in the second half of 2007 to increase the amount of our core capital;
managing the size of our investment portfolio, including selling assets to reduce the amount of capital that we
are required to hold and to realize investment gains; and reducing our common stock dividend beginning with
the first quarter of 2008. We also have not taken advantage of some opportunities to purchase and guarantee
mortgage assets at attractive prices and made other changes to our business practices to reduce our losses and
expenses.
Our issuances of preferred stock in 2007 resulted in a material change in the mix and relative cost of our
capital resources. The percentage of our core capital consisting of preferred stock increased from 22% as of
December 31, 2006 to 37% as of December 31, 2007. Issuing preferred stock is a more expensive method of
funding our operations than issuing debt securities. However, the reduction in our common stock dividend
beginning in the first quarter of 2008 will partially offset the increase in our preferred stock dividends as a
result of the additional preferred stock that we issued in 2007.
We expect the downturn in the housing market and the disruption in the mortgage and credit markets to
continue to negatively affect our earnings in 2008, and therefore to continue to negatively affect the amount of
our core capital. We believe we will maintain a sufficient amount of core capital to continue to meet our
statutory and OFHEO-directed minimum capital requirements through 2008. Nevertheless, if market conditions
are significantly worse than anticipated in 2008, we may be required to take actions, or refrain from taking
actions, to maintain a sufficient amount of core capital to meet our statutory and OFHEO-directed minimum
capital requirements. These actions could include reducing the size of our investment portfolio through
liquidations or by selling assets, issuing preferred, convertible preferred or common stock, reducing or
eliminating our common stock dividend, forgoing purchase and guaranty opportunities, and changing our
current business practices to reduce our losses and expenses. Refer to “Part I—Item 1A—Risk Factors” for a
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