Fannie Mae 2008 Annual Report Download - page 53

$200 billion and (2) increase the size of the mortgage portfolio allowed under the agreement by $50 billion to
$900 billion, with a corresponding increase in the allowable debt outstanding. Because an amended agreement
has not been executed as of the date of this report, the following discussion of the senior preferred stock
purchase agreement refers to the terms of that existing agreement, without these changes.
Cost of Treasury Investment. Beginning in 2010, we are obligated to pay a quarterly commitment fee to
Treasury in exchange for its continued funding commitment under the senior preferred stock purchase
agreement. This fee has not yet been established and could be substantial. We are also required to pay
dividends on the senior preferred stock at a rate of 10% per year (or 12% in specified circumstances) based on
the liquidation preference of the stock. As a result of our expected draw on Treasury’s funding commitment,
our annualized aggregate dividend payment to Treasury, at the 10% dividend rate, will increase to $1.6 billion.
The amount of the aggregate liquidation preference will increase to $16.2 billion as a result of our expected
draw. The aggregate liquidation preference of the senior preferred stock will increase further by the amount of
each additional draw on Treasury’s funding commitment. The liquidation preference may also increase by the
amount of each unpaid dividend if we fail to pay any required dividend and by the amount of each unpaid
quarterly commitment fee if we fail to pay any required commitment fee. Because dividends on the senior
preferred stock are paid based on the then-current liquidation preference of the stock, any further increases in
the liquidation preference will increase the amount of the dividends payable, and the increase may be
substantial. If the dividends payable are substantial, it could have a material adverse effect on our business,
results of operations, financial condition, liquidity and net worth. Moreover, increases in the liquidation
preference of the senior preferred stock will make it more difficult for us to achieve self-sustaining
profitability in the future.
Restrictions Relating to Covenants. The senior preferred stock purchase agreement we entered into with
Treasury includes a number of covenants that significantly restrict our business activities. We cannot, without
the prior written consent of Treasury: pay dividends; sell, issue, purchase or redeem Fannie Mae equity
securities; sell, transfer, lease or otherwise dispose of assets other than for fair market value in specified
situations; engage in transactions with affiliates other than on arm’s-length terms or in the ordinary course of
business; issue subordinated debt; or incur indebtedness that would result in our aggregate indebtedness
exceeding 110% of our aggregate indebtedness as of June 30, 2008. We provide a detailed description of these
covenants in “Item 1—Business—Conservatorship, Treasury Agreements, Our Charter and Regulation of Our
Activities—Treasury Agreements—Covenants Under Treasury Agreements—Senior Preferred Stock Purchase
Agreement Covenants.” The restrictions imposed by these covenants could adversely affect our business,
financial condition, results of operations, liquidity and net worth.
Mortgage Portfolio Cap. Pursuant to the senior preferred stock purchase agreement, we are not permitted to
increase the size of our mortgage portfolio to more than $850.0 billion through the end of 2009, and beginning
in 2010 we are required to reduce the size of our mortgage portfolio by 10% per year (based on the size of the
portfolio on December 31 of the prior year) until it reaches $250.0 billion. This mortgage portfolio cap may
force us to sell mortgage assets at unattractive prices and may prevent us from purchasing mortgage assets at
attractive prices. Moreover, the interest income we generate from the mortgage assets we hold in our portfolio
is a primary source of our revenue, which we expect will be reduced as the size of our portfolio is reduced.
As a result, this mortgage portfolio cap could have a material adverse effect on our business, financial
condition, results of operations, liquidity and net worth.
Indefinite Nature of Treasury Investment. We have issued to Treasury one million shares of senior preferred
stock and a warrant to purchase shares of our common stock equal to 79.9% of the total number of shares of
our common stock outstanding on a fully diluted basis on the date of exercise. The senior preferred stock will
remain outstanding until Treasury’s funding commitment is terminated and the liquidation preference on the
senior preferred stock is fully repaid. Treasury’s funding commitment will terminate under any of the
following circumstances: (1) the completion of our liquidation and fulfillment of Treasury’s obligations under
its funding commitment at that time, (2) the payment in full of, or the reasonable provision for, all of our
liabilities (whether or not contingent, including mortgage guaranty obligations), or (3) the funding by Treasury
of $100.0 billion under the commitment. The warrant will remain exercisable through September 7, 2028.
Accordingly, even if the conservatorship is terminated, the U.S. government will have an equity ownership
stake in our company so long as the senior preferred stock is outstanding, the warrant is exercisable or the
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