Fannie Mae 2013 Annual Report Download - page 120

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Dodd-Frank Act—FHFA Rule Regarding Stress Testing
See “Business—Our Charter and Regulation of Our Activities—The Dodd-Frank Act—Stress Testing” for a description of
FHFA’s final rule implementing the Dodd-Frank Act’s stress test requirements for Fannie Mae, Freddie Mac and the Federal
Home Loan Banks.
Capital Activity
We are effectively unable to raise equity capital from private sources at this time and, therefore, are reliant on the funding
available under the senior preferred stock purchase agreement to address any net worth deficit.
Senior Preferred Stock Purchase Agreement
As a result of the covenants under the stock purchase agreement, Treasury’s ownership of the warrant to purchase up to
79.9% of the total shares of our common stock outstanding and the significant uncertainty regarding our future, we
effectively no longer have access to equity funding except through draws under the senior preferred stock purchase
agreement.
Under the senior preferred stock purchase agreement, Treasury made a commitment to provide funding, under certain
conditions, to eliminate deficiencies in our net worth. We have received a total of $116.1 billion from Treasury pursuant to
the senior preferred stock purchase agreement as of December 31, 2013. The aggregate liquidation preference of the senior
preferred stock, including the initial aggregate liquidation preference of $1.0 billion, remains at $117.1 billion.
While we had a positive net worth as of December 31, 2013 and have not received funds from Treasury under the agreement
since the first quarter of 2012, we would be required to obtain additional funding from Treasury pursuant to the senior
preferred stock purchase agreement if we have a net worth deficit in future periods. As of the date of this filing, the amount of
remaining available funding under the senior preferred stock purchase agreement is $117.6 billion. For additional
information, see “Business—Conservatorship and Treasury Agreements—Treasury Agreements—Senior Preferred Stock
Purchase Agreement and Related Issuance of Senior Preferred Stock and Common Stock Warrant—Senior Preferred Stock
Purchase Agreement.”
We are not permitted to redeem the senior preferred stock prior to the termination of Treasury’s funding commitment under
the senior preferred stock purchase agreement. Moreover, we are not permitted to pay down the liquidation preference of the
outstanding shares of senior preferred stock except in limited circumstances. The limited circumstances under which
Treasury’s funding commitment will terminate and under which we can pay down the liquidation preference of the senior
preferred stock are described in “Business—Conservatorship and Treasury Agreements—Treasury Agreements.”
Dividends
Our fourth quarter 2013 dividend of $8.6 billion was declared by FHFA and subsequently paid by us on December 31, 2013,
bringing our senior preferred stock dividends paid in 2013 to $82.5 billion. For each dividend period from January 1, 2013
through and including December 31, 2017, when, as and if declared, the dividend amount will be the amount, if any, by
which our net worth as of the end of the immediately preceding fiscal quarter exceeds an applicable capital reserve amount.
The capital reserve amount was $3.0 billion for dividend periods in 2013, decreased to $2.4 billion for dividend periods in
2014 and will continue to be reduced by $600 million each year until it reaches zero on January 1, 2018. For each dividend
period beginning in 2018, the dividend amount will be the entire amount of our net worth, if any, as of the end of the
immediately preceding fiscal quarter. Based on the terms of the senior preferred stock purchase agreement, we expect to pay
Treasury a dividend for the first quarter of 2014 of $7.2 billion by March 31, 2014.
See “Risk Factors” for a discussion of the risks relating to our dividend obligations to Treasury on the senior preferred stock.
See “Business—Conservatorship and Treasury Agreements—Treasury Agreements” for more information on the terms of the
senior preferred stock and our senior preferred stock purchase agreement with Treasury.
OFF-BALANCE SHEET ARRANGEMENTS
We enter into certain business arrangements to facilitate our statutory purpose of providing liquidity to the secondary
mortgage market and to reduce our exposure to interest rate fluctuations. Some of these arrangements are not recorded in our
consolidated balance sheets or may be recorded in amounts different from the full contract or notional amount of the
transaction, depending on the nature or structure of, and accounting required to be applied to, the arrangement. These
arrangements are commonly referred to as “off-balance sheet arrangements” and expose us to potential losses in excess of the
amounts recorded in our consolidated balance sheets.