Fannie Mae 2009 Annual Report Download - page 366

MBS held by third parties; and (3) 0.25% of other off-balance sheet obligations, which may be adjusted by the
Director of FHFA under certain circumstances.
FHFA’s risk-based capital requirement ties our capital requirements to the performance of our risk positions
when subjected to a stress test. 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 purchase agreement, we are required to comply with certain
restrictions and covenants. Set forth below are additional restrictions related to our capital requirements:
Restrictions Under GSE Act. Under the GSE Act, FHFA has the authority to prohibit capital distributions,
including payment of dividends, if we fail to meet our capital requirements. If FHFA classifies us as
significantly undercapitalized, we must obtain the approval of the Director of FHFA for any dividend payment.
Under the GSE Act, we are not permitted to make a capital distribution if, after making the distribution, we
would be undercapitalized. The Director of FHFA, however, 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: our core capital is below 125% of our critical capital requirement; or 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, 2009 and 2008, our core capital was below 125% of our
critical capital requirement; however, we have been directed by FHFA to continue paying principal and
interest on our outstanding subordinated debt during the conservatorship and thereafter until directed
otherwise, regardless of our existing capital levels.
Prior to conservatorship, we had other restrictions and covenants to meet, including minimum capital
requirements, under the terms of various agreements and consent orders with FHFA. We were in compliance
with these restrictions until they were suspended October 9, 2008 following our entry into conservatorship.
18. Concentrations of Credit Risk
Concentrations of credit risk arise when a number of customers and counterparties engage in similar activities
or have similar economic characteristics that make them susceptible to similar changes in industry conditions,
which could affect their ability to meet their contractual obligations. Based on our assessment of business
conditions that could impact our financial results, including those conditions arising through February 26,
2010, we have determined that concentrations of credit risk exist among single-family and multifamily
borrowers (including geographic concentrations and loans with certain non-traditional features), mortgage
insurers, mortgage servicers, derivative counterparties and parties associated with our off-balance sheet
transactions. Concentrations for each of these groups are discussed below.
F-108
FANNIE MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)