Fannie Mae 2010 Annual Report Download - page 72

to excess inventory of unsold homes. We also expect heightened default and severity rates to continue during
this period, and home prices, particularly in some geographic areas, may decline further. Any resulting
increase in delinquencies or defaults, or in severity, will likely result in a higher level of credit losses and
credit-related expenses, which in turn will reduce our earnings and adversely affect our net worth and financial
condition.
Our business volume is affected by the rate of growth in total U.S. residential mortgage debt outstanding and
the size of the U.S. residential mortgage market. The rate of growth in total U.S. residential mortgage debt
outstanding has declined substantially in response to the reduced activity in the housing market and declines in
home prices, and we expect single-family mortgage debt outstanding to decrease by approximately 2% in
2011. A decline in the rate of growth in mortgage debt outstanding reduces the unpaid principal balance of
mortgage loans available for us to purchase or securitize, which in turn could reduce our net interest income
and guaranty fee income. Even if we are able to increase our share of the secondary mortgage market, it may
not be sufficient to make up for the decline in the rate of growth in mortgage originations, which could
adversely affect our results of operations and financial condition.
The Dodd-Frank Act and regulatory changes in the financial services industry may negatively impact our
business.
The Dodd-Frank Act will significantly change the regulation of the financial services industry, including by
the creation of new standards related to regulatory oversight of systemically important financial companies,
derivatives transactions, asset-backed securitization, mortgage underwriting and consumer financial protection.
This legislation will directly and indirectly affect many aspects of our business and could have a material
adverse effect on our business, results of operations, financial condition, liquidity and net worth. The Dodd-
Frank Act and related future regulatory changes could require us to change certain business practices, cause us
to incur significant additional costs, limit the products we offer, require us to increase our regulatory capital or
otherwise adversely affect our business. Additionally, implementation of this legislation will result in increased
supervision and more comprehensive regulation of our customers and counterparties in the financial services
industry, which may have a significant impact on the business practices of our customers and counterparties,
as well as on our counterparty credit risk.
Examples of aspects of the Dodd-Frank Act and related future regulatory changes that, if applicable, may
significantly affect us include mandatory clearing of certain derivatives transactions, which could impose
significant additional costs on us; minimum standards for residential mortgage loans, which could subject us
to increased legal risk for loans we purchase or guarantee; and the development of credit risk retention
regulations applicable to residential mortgage loan securitizations, which could impact the types and volume
of loans sold to us. We could also be designated as a systemically important nonbank financial company
subject to supervision and regulation by the Federal Reserve. If this were to occur, the Federal Reserve would
have the authority to examine us and could impose stricter prudential standards on us, including risk-based
capital requirements, leverage limits, liquidity requirements, credit concentration limits, resolution plan and
credit exposure reporting requirements, overall risk management requirements, contingent capital requirements,
enhanced public disclosures and short-term debt limits. Regulators have been seeking public comment
regarding the criteria for designating nonbank financial companies for heightened supervision.
Because federal agencies have not completed the extensive rulemaking processes needed to implement and
clarify many of the provisions of the Dodd-Frank Act, it is difficult to assess fully the impact of this
legislation on our business and industry at this time, nor can we predict what similar changes to statutes or
regulations will occur in the future.
Recent revisions by the Basel Committee on Banking Supervision to international capital requirements,
referred to as Basel III, may also have a significant impact on us or on the business practices of our customers
and counterparties. Depending on how they are implemented by regulators, the Basel III rules could be the
basis for a revised framework for GSE capital standards that could increase our capital requirements. The
Basel III rules could also affect investor demand for our debt and MBS securities, and could limit some
lenders’ ability to count their rights to service mortgage loans toward meeting their regulatory capital
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