Fannie Mae 2008 Annual Report Download - page 58

with a different model. Refer to “Part II—Item 7—MD&A—Off-Balance Sheet Arrangements and Variable
Interest Entities” for a description of our MBS trusts as QSPEs. The FASB’s proposed amendments are not
final and may be revised before final rules are issued. The proposed amendments would be effective for new
transfers of financial assets and to all variable interest entities on or after January 1, 2010.
If the QSPE concept is eliminated from SFAS 140, all of our securitization structures that are currently QSPEs
will have to be evaluated under FIN 46R for consolidation. Currently, we evaluate the MBS trusts used in our
securitizations to determine whether they are QSPEs. If they are QSPEs, we do not consolidate them if we do
not have the unilateral ability to dissolve them. FASB’s proposal would potentially require consolidation of the
loans and debt of our MBS trusts onto our balance sheet.
As of December 31, 2008, we had issued over $2.5 trillion of Fannie Mae MBS. Although we cannot at this
time predict the content of the final amendments, we may be required to consolidate the assets and liabilities
of some or all of these MBS trusts. If we are required to consolidate the assets and liabilities of some or all of
these MBS trusts, these assets and liabilities would initially be reported at fair value under the FASB’s
currently proposed rules. If the fair value of those assets is substantially less than the fair value of the
corresponding liabilities (which would be the case under current market conditions), our net worth would be
severely impacted and Treasury’s funding commitment may not be sufficient to prevent our mandatory
receivership. However, at the FASB’s January 28, 2009 meeting, a tentative decision was reached that the
incremental assets and liabilities to be consolidated upon adoption should be recognized at their carrying
values, and the FASB indicated that fair value would only be permitted if determining the carrying value is
not practicable. As a result of this tentative decision, we could also experience a reduction in our net worth.
In addition, under our existing regulatory capital standards, which are currently suspended while we are in
conservatorship, the amount of capital that we are required to hold for obligations reported on our balance
sheet is significantly higher than the amount of capital that we are required to hold for the guarantees that we
provide to the MBS trusts. Accordingly, if we are required to consolidate the assets and liabilities of our MBS
trusts, we would be required to increase capital to satisfy regulatory capital requirements unless legislation is
passed or FHFA adopts new capital standards that alter this requirement. If we do not have enough capital to
meet these higher regulatory capital requirements, we could incur penalties and also could be subject to
further restrictions on our activities and operations, or to investigation and enforcement actions by the FHFA.
Under the Regulatory Reform Act, the FHFA may place us into receivership if it classifies us as critically
undercapitalized. Moreover, changes to the accounting treatment for securitizations may impact the market for
securitizations, which could weaken demand for, and reduce the liquidity of, our Fannie Mae MBS.
Finally, implementation of these proposed changes would fundamentally alter our financial reporting model,
requiring significant operational and systems changes. Depending on the implementation date ultimately
required by FASB, it may be difficult or impossible for us to make all such changes in a controlled manner by
the effective date. Failure to make such changes by the effective date could have a material adverse impact on
us, including our ability to prepare timely financial reports. In addition, making such changes in a compressed
time frame would divert resources from other ongoing corporate initiatives, which could have a material
adverse impact on us. We cannot predict what the final amendments to SFAS 140 and FIN 46R will be, nor
can we predict whether we will be required to consolidate all, some or none of the assets and liabilities of our
MBS trusts, or the effect of a consolidation of those assets and liabilities on our securitization activities,
results of operations or net worth. Further, we cannot predict the impact that these or other amendments or
guidance of the FASB that may be adopted in the future may have on our accounting policies and methods,
which are fundamental to how we report our financial condition and results of operations.
A decrease in our credit ratings would have an adverse effect on our ability to issue debt on reasonable
terms, which could reduce our earnings and materially adversely affect our ability to conduct our normal
business operations and our liquidity, financial condition and results of operations.
Our borrowing costs and our access to the debt capital markets depend in large part on the high credit ratings
on our senior unsecured debt. Our ratings are subject to revision or withdrawal at any time by the rating
agencies. Factors such as the amount of our net losses, deterioration in our financial condition, actions by
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