Fannie Mae 2008 Annual Report Download - page 66

participate in these programs in large numbers, it is likely that the costs we incur associated with the
modifications of loans in our guaranty book of business, as well as the borrower and servicer incentive fees
associated with them, will be substantial, and these programs would therefore likely have a material adverse
effect on our business, results of operations, financial condition and net worth. We do not know what other
actions other agencies of the U.S. government, as well as Congress may direct us to take in the future.
Additionally, the Charter Act defines our permissible business activities. For example, we may not purchase
single-family loans in excess of the conforming loan limits. In addition, under the Charter Act, our business is
limited to the U.S. housing finance sector. As a result of these limitations on our ability to diversify our
operations, our financial condition and earnings depend almost entirely on conditions in a single sector of the
U.S. economy, specifically, the U.S. housing market. Our substantial reliance on conditions in the
U.S. housing market may adversely affect the investment returns we are able to generate.
The current housing goals and subgoals for our business require that a specified portion of our mortgage
purchases during each calendar year relate to the purchase or securitization of mortgage loans that finance
housing for low- and moderate-income households, housing in underserved areas and qualified housing under
the definition of special affordable housing. Many of these goals and subgoals increased in 2008 over 2007
levels. These increases in goal levels and recent housing and mortgage market conditions, particularly the
significant changes in the housing market that began in the third quarter of 2007, have made it increasingly
challenging and expensive to meet our housing goals and subgoals. Based on preliminary calculations, we
believe we did not meet several of our housing goals or any of the home purchase subgoals for 2008. If our
efforts to meet the housing goals and special affordable housing subgoals prove to be insufficient and FHFA
finds that the goals were feasible, we may become subject to a housing plan that could require us to take
additional steps that could have an adverse effect on our profitability. The potential penalties for failure to
comply with housing plan requirements are a cease-and-desist order and civil money penalties. The Regulatory
Reform Act set the goals for 2009 at 2008 levels, but directed FHFA to determine whether these levels are
feasible for 2009. We will not know what the final goal levels will be until FHFA announces them.
Our business faces significant operational risks and an operational failure could materially adversely affect
our business, results of operations, financial condition, liquidity and net worth.
Shortcomings or failures in our internal processes, people or systems could have a material adverse effect on
our risk management, liquidity, financial condition and results of operations; disrupt our business; and result in
legislative or regulatory intervention, damage to our reputation and liability to customers. For example, our
business is dependent on our ability to manage and process, on a daily basis, a large number of transactions
across numerous and diverse markets. These transactions are subject to various legal and regulatory standards.
We rely on the ability of our employees and our internal financial, accounting, cash management, data
processing and other operating systems, as well as technological systems operated by third parties, to process
these transactions and to manage our business. The steps we have taken and are taking to enhance our
technology and operational controls and organizational structure may not be effective to manage these risks
and may create additional operational risk as we execute these enhancements.
Due to events relating to the conservatorship, including changes in management, employees and business
practices, our operational risk may increase and could result in business interruptions and financial losses. In
addition, due to events that are wholly or partially beyond our control, these employees or third parties could
engage in improper or unauthorized actions, or these systems could fail to operate properly, which could lead
to financial losses, business disruptions, legal and regulatory sanctions, and reputational damage.
On February 18, 2009, the Obama Administration announced HASP. We will act as the program administrator
for the loan modification program under HASP. Our role is expected to be substantial, requiring significant
levels of internal resources and management attention, which may therefore be shifted away from current
corporate initiatives. This shift could have a material adverse effect on our business, results of operations,
financial condition and net worth.
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