Fannie Mae 2008 Annual Report Download - page 382

Prior to Conservatorship
Capital Classification
The Federal Housing Enterprises Financial Safety and Soundness Act of 1992 (the “1992 Act”) established
minimum capital, critical capital and risk-based capital requirements for Fannie Mae. Based upon these
requirements, OFHEO classified us on a quarterly basis as either adequately capitalized, undercapitalized,
significantly undercapitalized or critically undercapitalized. We are required by federal statute to meet the
minimum, critical and risk-based capital requirements to be classified as adequately capitalized.
Our minimum capital and critical capital requirements are based on core capital holdings. Defined in the
statute, core capital is equal to the sum of the stated value of outstanding common stock (common stock less
treasury stock), the stated value of outstanding non-cumulative perpetual preferred stock, paid-in capital and
retained earnings, as determined in accordance with GAAP. The statutory minimum capital requirement is
generally equal to the sum of: (i) 2.50% of on-balance sheet assets; (ii) 0.45% of the unpaid principal balance
of outstanding Fannie Mae MBS held by third parties; and (iii) up to 0.45% of other off- balance sheet
obligations, which may be adjusted by the Director of OFHEO under certain circumstances (see 12 CFR
1750.4 for existing adjustments made by the Director of OFHEO). The critical capital requirement is generally
equal to the sum of: (i) 1.25% of on-balance sheet assets; (ii) 0.25% of the unpaid principal balance of
outstanding Fannie Mae MBS held by third parties; and (iii) up to 0.25% of other off-balance sheet
obligations, which may be adjusted by the Director of OFHEO under certain circumstances.
OFHEO’s risk-based capital requirement ties our capital requirements to the risk in our mortgage credit book
of business, as measured by a stress test model. The stress test simulates our financial performance over a ten-
year period of severe economic conditions characterized by both extreme interest rate movements and high
mortgage default rates. Simulation results indicate the amount of capital required to survive this prolonged
period of economic stress without new business or active risk management action. In addition to this model-
based amount, the risk-based capital requirement includes a 30% surcharge to cover unspecified management
and operations risks.
Compliance with Agreement
Under the terms of the senior preferred stock agreement described in “Note 17, Stockholders’ Equity
(Deficit),” we are required to be in compliance with certain restrictions and covenants. In addition, below are
additional restrictions related to our capital requirements:
Restrictions Under Regulatory Reform Act. Under the Regulatory Reform Act, FHFA has authority to
prohibit capital distributions, including payment of dividends, if we fail to meet our capital requirements. If
FHFA classifies us as significantly undercapitalized, approval of the Director of FHFA is required for any
dividend payment. Under the Regulatory Reform Act, we are not permitted to make a capital distribution if,
after making the distribution, we would be undercapitalized, except the Director of FHFA may permit us to
repurchase shares if the repurchase is made in connection with the issuance of additional shares or obligations
in at least an equivalent amount and will reduce our financial obligations or otherwise improve our financial
condition.
Restrictions Relating to Subordinated Debt. During any period in which we defer payment of interest on
qualifying subordinated debt, we may not declare or pay dividends on, or redeem, purchase or acquire, our
common stock or preferred stock. Our qualifying subordinated debt provides for the deferral of the payment of
interest for up to five years if either: (i) our core capital is below 125% of our critical capital requirement; or
(ii) our core capital is below our statutory minimum capital requirement, and the U.S. Secretary of the
Treasury, acting on our request, exercises his or her discretionary authority pursuant to Section 304(c) of the
Charter Act to purchase our debt obligations. As of December 31, 2008, our core capital was below 125% of
F-104
FANNIE MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)