Fannie Mae 2012 Annual Report Download - page 63

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generally narrowed the definition of capital that can be used to meet risk-based standards and raised the amount of capital
that must be held by banks. Basel III also established liquidity requirements for banks. On January 6, 2013, the Basel
Committee revised these liquidity rules to require banks subject to Basel III to hold a specified level of high-quality liquid
assets, no more than 40% of which may be composed of certain types of assets, including debt and mortgage-related
securities of Fannie Mae, Freddie Mac and the other GSEs. These requirements will be phased in from 2015 through 2018.
U.S. banking regulators are already working to update Basel capital standards in the United States. We believe substantially
more than 40% of U.S. banks’ liquid assets are currently composed of GSE debt and mortgage-related securities. Depending
on how the Basel III liquidity rules are implemented in the United States, in the future they could materially, adversely affect
demand by banks for our debt securities and Fannie Mae MBS.
In addition, Basel III’s revisions to international capital requirements, depending on how they are implemented in the United
States, could limit some lenders’ ability to count the value of their rights to service mortgage loans as assets in meeting their
regulatory capital requirements, which may reduce the economic value of mortgage servicing rights. As a result, a number of
our customers and counterparties may change their business practices, including reducing the amount of loans they service or
exiting servicing altogether.
Material weaknesses in our internal control over financial reporting could result in errors in our reported results or
disclosures that are not complete or accurate.
Management has determined that, as of the date of this filing, we have ineffective disclosure controls and procedures and a
material weakness in our internal control over financial reporting. In addition, our independent registered public accounting
firm, Deloitte & Touche LLP, has expressed an adverse opinion on our internal control over financial reporting because of the
material weakness. Our ineffective disclosure controls and procedures and material weakness could result in errors in our
reported results or disclosures that are not complete or accurate, which could have a material adverse effect on our business
and operations.
Our material weakness relates specifically to the impact of the conservatorship on our disclosure controls and procedures.
Because we are under the control of FHFA, some of the information that we may need to meet our disclosure obligations may
be solely within the knowledge of FHFA. As our conservator, FHFA has the power to take actions without our knowledge that
could be material to our shareholders and other stakeholders, and could significantly affect our financial performance or our
continued existence as an ongoing business. Because FHFA currently functions as both our regulator and our conservator,
there are inherent structural limitations on our ability to design, implement, test or operate effective disclosure controls and
procedures relating to information within FHFA’s knowledge. As a result, we have not been able to update our disclosure
controls and procedures in a manner that adequately ensures the accumulation and communication to management of
information known to FHFA that is needed to meet our disclosure obligations under the federal securities laws, including
disclosures affecting our financial statements. Given the structural nature of this material weakness, it is likely that we will
not remediate this weakness while we are under conservatorship. See “Controls and Procedures” for further discussion of
management’s conclusions on our disclosure controls and procedures and internal control over financial reporting.
In many cases, our accounting policies and methods, which are fundamental to how we report our financial condition and
results of operations, require management to make judgments and estimates about matters that are inherently uncertain.
Management also relies on models in making these estimates.
Our accounting policies and methods are fundamental to how we record and report our financial condition and results of
operations. Our management must exercise judgment in applying many of these accounting policies and methods so that
these policies and methods comply with GAAP and reflect management’s judgment of the most appropriate manner to report
our financial condition and results of operations. In some cases, management must select the appropriate accounting policy or
method from two or more alternatives, any of which might be reasonable under the circumstances but might affect the
amounts of assets, liabilities, revenues and expenses that we report. See “Note 1, Summary of Significant Accounting
Policies” for a description of our significant accounting policies.
We have identified some of our accounting policies as being critical to the presentation of our financial condition and results
of operations. These accounting policies are described in “MD&A—Critical Accounting Policies and Estimates.” We believe
these policies are critical because they require management to make particularly subjective or complex judgments about
matters that are inherently uncertain and because of the likelihood that materially different amounts would be reported under
different conditions or using different assumptions.
Because our financial statements involve estimates for amounts that are very large, even a small change in the estimate can
have a significant impact for the reporting period. For example, because our total loss reserves are so large, even a change
that has a small impact relative to the size of our loss reserves can have a meaningful impact on our results for the quarter in
which we make the change.