Fannie Mae 2010 Annual Report Download - page 61

we were to sell these securities could be materially lower than the estimated fair value at which we carry them
on our balance sheet.
Any of the above factors could require us to record additional write-downs in the value of our investment
portfolio, which could have a material adverse effect on our business, results of operations, financial condition,
liquidity and net worth.
Our business activities are significantly affected by the conservatorship and the senior preferred stock
purchase agreement.
We are currently under the control of our conservator, FHFA, and we do not know when or how the
conservatorship will be terminated. As conservator, FHFA can direct us to enter into contracts or enter into
contracts on our behalf, and generally has the power to transfer or sell any of our assets or liabilities. In
addition, our directors do not have any duties to any person or entity except to the conservator. Accordingly,
our directors are not obligated to consider the interests of the company, the holders of our equity or debt
securities or the holders of Fannie Mae MBS in making or approving a decision unless specifically directed to
do so by the conservator.
The conservator has determined that while we are in conservatorship, we will be limited to continuing our
existing core business activities and taking actions necessary to advance the goals of the conservatorship. In
view of the conservatorship and the reasons stated for its establishment, it is likely that our business model
and strategic objectives will continue to change, possibly significantly, including in pursuit of our public
mission and other non-financial objectives. Among other things, we could experience significant changes in
the size, growth and characteristics of our guarantor and investment activities, and we could further change
our operational objectives, including our pricing strategy in our core mortgage guaranty business. Accordingly,
our strategic and operational focus going forward may not be consistent with the investment objectives of our
investors. In addition, we may be directed to engage in activities that are operationally difficult, costly to
implement or unprofitable.
The senior preferred stock purchase agreement with Treasury includes a number of covenants that significantly
restrict our business activities. We cannot, without the prior written consent of Treasury: pay dividends (except
on the senior preferred stock); sell, issue, purchase or redeem Fannie Mae equity securities; sell, transfer, lease
or otherwise dispose of assets 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 120% of the amount of mortgage assets we are allowed to own.
In deciding whether to consent to any request for approval it receives from us under the agreement, Treasury
has the right to withhold its consent for any reason and is not required by the agreement to consider any
particular factors, including whether or not management believes that the transaction would benefit the
company. Pursuant to the senior preferred stock purchase agreement, the maximum allowable amount of
mortgage assets we may own on December 31, 2010 is $810 billion. (Our mortgage assets were approximately
$788.8 billion as of that date.) On December 31, 2011, and each December 31 thereafter, our mortgage assets
may not exceed 90% of the maximum allowable amount that we were permitted to own as of December 31 of
the immediately preceding calendar year. The maximum allowable amount is reduced annually until it reaches
$250 billion. This limit on the amount of mortgage assets we are permitted to hold could constrain the amount
of delinquent loans we purchase from single-family MBS trusts, which could increase our costs.
We discuss the powers of the conservator, the terms of the senior preferred stock purchase agreement, and
their impact on us and shareholders in “Business—Conservatorship and Treasury Agreements.” These factors
may adversely affect our business, results of operations, financial condition, liquidity and net worth.
The conservatorship and investment by Treasury have had, and will continue to have, a material adverse
effect on our common and preferred shareholders.
We do not know when or how the conservatorship will be terminated. Moreover, even if the conservatorship is
terminated, we remain subject to the terms of the senior preferred stock purchase agreement, senior preferred
stock and warrant, which can only be cancelled or modified by mutual consent of Treasury and the
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