Fannie Mae 2007 Annual Report Download - page 35

Charter Act
The Charter Act sets forth the activities that we are permitted to conduct, authorizes us to issue debt and
equity securities, and describes our general corporate powers. The Charter Act states that our purpose is to:
• provide stability in the secondary market for residential mortgages;
• respond appropriately to the private capital market;
• provide ongoing assistance to the secondary market for residential mortgages (including activities relating
to mortgages on housing for low- and moderate-income families involving a reasonable economic return
that may be less than the return earned on other activities) by increasing the liquidity of mortgage
investments and improving the distribution of investment capital available for residential mortgage
financing; and
• promote access to mortgage credit throughout the nation (including central cities, rural areas and
underserved areas) by increasing the liquidity of mortgage investments and improving the distribution of
investment capital available for residential mortgage financing.
In addition to the alignment of our overall strategy with these purposes, all of our business activities must be
permissible under the Charter Act. Our charter authorizes us to, among other things, purchase, service, sell,
lend on the security of, and otherwise deal in certain mortgage loans; issue debt obligations and mortgage-
related securities; and “do all things as are necessary or incidental to the proper management of [our] affairs
and the proper conduct of [our] business.”
Loan Standards
Mortgage loans we purchase or securitize must meet the following standards required by the Charter Act.
•Principal Balance Limitations. Our charter permits us to purchase and securitize conventional mortgage
loans secured by either a single-family or multifamily property. Single-family conventional mortgage loans
are generally subject to maximum original principal balance limits. The principal balance limits are often
referred to as “conforming loan limits” and are established each year based on the national average price of
a one-family residence. OFHEO has set the conforming loan limit for a one-family residence at $417,000
for 2007 and 2008. In February 2008, Congress passed legislation that temporarily increases the conforming
loan limit in high-cost metropolitan areas for loans originated between July 1, 2007 and December 31,
2008. For a one-family residence, the loan limit increased to 125% of the area’s median house price, up to a
maximum of $729,750. Higher original principal balance limits apply to mortgage loans secured by two- to
four-family residences and also to loans in Alaska, Hawaii, Guam and the Virgin Islands. No statutory limits
apply to the maximum original principal balance of multifamily mortgage loans that we purchase or
securitize. In addition, the Charter Act imposes no maximum original principal balance limits on loans we
purchase or securitize that are either insured by the FHA or guaranteed by the VA.
•Quality Standards. The Charter Act requires that, so far as practicable and in our judgment, the
mortgage loans we purchase or securitize must be of a quality, type and class that generally meet the
purchase standards of private institutional mortgage investors. To comply with this requirement and to
operate our business efficiently, we have eligibility policies and provide guidelines both for the mortgage
loans we purchase or securitize and for the sellers and servicers of these loans.
•Loan-to-Value and Credit Enhancement Requirements. The Charter Act generally requires credit
enhancement on any conventional single-family mortgage loan that we purchase or securitize if it has a
loan-to-value ratio over 80% at the time of purchase. We also do not purchase or securitize second lien
single-family mortgage loans when the combined loan-to-value ratio exceeds 80%, unless the second lien
mortgage loan has credit enhancement in accordance with the requirements of the Charter Act. The credit
enhancement required by our charter may take the form of one or more of the following: (i) insurance or
a guaranty by a qualified insurer; (ii) a seller’s agreement to repurchase or replace any mortgage loan in
default (for such period and under such circumstances as we may require); or (iii) retention by the seller
of at least a 10% participation interest in the mortgage loans. We do not adjust the loan-to-value ratio of
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