Fannie Mae 2012 Annual Report Download - page 310

FANNIE MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
F-76
(3) Generally, the sum of (a) 2.50% of on-balance sheet assets, except those underlying Fannie Mae MBS held by third parties; (b) 0.45%
of the unpaid principal balance of outstanding Fannie Mae MBS held by third parties; and (c) up to 0.45% of other off-balance sheet
obligations, which may be adjusted by the Director of FHFA under certain circumstances (See 12 CFR 1750.4 for existing adjustments
made by the Director).
Our critical capital requirement is generally equal to the sum of: (1) 1.25% of on-balance sheet assets, except those
underlying Fannie Mae MBS held by third parties; (2) 0.25% of the unpaid principal balance of outstanding Fannie Mae
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.
As of December 31, 2012 and 2011, we had a minimum capital deficiency of $141.2 billion and $148.4 billion, respectively.
Under the terms of the senior preferred stock purchase agreement, starting January 1, 2013, we are required to pay Treasury
each quarter dividends equal to the excess of our net worth as of the end of the preceding quarter over an applicable capital
reserve amount. As a result, in periods in which we have net worth, our minimum capital deficiency will decline to the extent
of our net worth but the deficiency will increase in the subsequent period as we pay Treasury the corresponding preferred
stock dividend. Set forth below are additional restrictions related to our capital requirements.
Restrictions on Capital Distributions and Dividends
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, 2012 and 2011, 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 were subject to certain regulatory capital requirements, including minimum capital requirements,
under the terms of various agreements and consent orders with OFHEO. We were in compliance with these regulatory capital
requirements until they were suspended October 9, 2008 following our entry into conservatorship.
16. 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 April 2, 2013, we have determined that concentrations of credit risk exist among
single-family and multifamily borrowers (including geographic concentrations and loans with certain higher-risk
characteristics), mortgage sellers/servicers, mortgage insurers, financial guarantors, lenders with risk sharing, derivative
counterparties and parties associated with our off-balance sheet transactions. Concentrations for each of these groups are
discussed below.
Single-Family Loan Borrowers
Regional economic conditions may affect a borrower’s ability to repay his or her mortgage loan and the property value
underlying the loan. Geographic concentrations increase the exposure of our portfolio to changes in credit risk. Single-family
borrowers are primarily affected by home prices and interest rates. The geographic dispersion of our single-family business
has been consistently diversified over the years ended December 31, 2012 and 2011, with our largest exposures in the
Western region of the United States, which represented approximately 27% of our single-family conventional guaranty book
of business as of December 31, 2012 and 2011. Except for California, where approximately 19% of the gross unpaid principal