Fannie Mae 2010 Annual Report Download - page 58

Item 1A. Risk Factors
This section identifies specific risks that should be considered carefully in evaluating our business. The risks
described in “Risks Relating to Our Business” are specific to us and our business, while those described in
“Risks Relating to Our Industry” relate to the industry in which we operate. Refer to “MD&A—Risk
Management” for a more detailed description of the primary risks to our business and how we seek to manage
those risks.
In addition to the risks we discuss below, we face risks and uncertainties not currently known to us or that we
currently deem to be immaterial. The risks we face could materially adversely affect our business, results of
operations, financial condition, liquidity and net worth and could cause our actual results to differ materially
from our past results or the results contemplated by the forward-looking statements contained in this report.
RISKS RELATING TO OUR BUSINESS
The future of our company is uncertain.
There is significant uncertainty regarding the future of our company, including how long we will continue to
be in existence, the extent of our role in the market, what form we will have, and what ownership interest, if
any, our current common and preferred stockholders will hold in us after the conservatorship is terminated.
On February 11, 2011, Treasury and HUD released a report to Congress on reforming America’s housing
finance market. The report provides that the Administration will work with FHFA to determine the best way to
responsibly reduce Fannie Mae’s and Freddie Mac’s role in the market and ultimately wind down both
institutions. The report does not state whether or how the existing infrastructure or human capital of Fannie
Mae may be used in the establishment of such a reformed system. The report emphasizes the importance of
proceeding with a careful transition plan and providing the necessary financial support to Fannie Mae and
Freddie Mac during the transition period.
During 2010, Congress held hearings on the future status of Fannie Mae and Freddie Mac, the Congressional
Budget Office released a study examining various alternatives for the future of the secondary mortgage
market, and legislative proposals were introduced that would substantially change our business structure and
the operation of our business. We expect hearings on GSE reform to continue in 2011 and additional proposals
to be discussed, including proposals that would result in a substantial change to our business structure or that
involve Fannie Mae’s liquidation or dissolution. We cannot predict the prospects for the enactment, timing or
content of legislative proposals regarding the future status of the GSEs. See “Business—Legislation and GSE
Reform” for more information about the Treasury report and Congressional proposals regarding reform of the
GSEs.
We expect FHFA to request additional funds from Treasury on our behalf to ensure we maintain a positive
net worth and avoid mandatory receivership. The dividends we must pay or that accrue on Treasury’s
investments are substantial and are expected to increase, and we likely will not be able to fund them
through net income.
FHFA must place us into receivership if the Director of FHFA makes a written determination that our assets
are less than our obligations (which we refer to as a net worth deficit) or if we have not been paying our
debts, in either case, for a period of 60 days after the filing deadline for our Form 10-K or Form-Q with the
SEC. We have had a net worth deficit as of the end of each of the last nine fiscal quarters, including as of
December 31, 2010. Treasury provided us with funds under the senior preferred stock purchase agreement to
cure the net worth deficits in prior periods before the end of the 60-day period, and we expect Treasury to do
the same with respect to the December 31, 2010 deficit. When Treasury provides the additional $2.6 billion
FHFA has requested on our behalf, the aggregate liquidation preference on the senior preferred stock will be
$91.2 billion, and will require an annualized dividend of $9.1 billion. The prospective $9.1 billion annual
dividend obligation exceeds our reported annual net income for each of the last nine years, in most cases by a
significant margin. Our ability to maintain a positive net worth has been and continues to be adversely
affected by market conditions. To the extent we have a negative net worth as of the end of future fiscal
53