Fannie Mae 2013 Annual Report Download - page 37

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Affordable Housing Allocations. The GSE Act requires us and Freddie Mac to set aside in each fiscal year an amount equal to
4.2 basis points for each dollar of the unpaid principal balance of our total new business purchases to fund HUD’s Housing
Trust Fund and Treasury’s Capital Magnet Fund, with 65% of this amount allocated to the Housing Trust Fund and the
remaining 35% allocated to the Capital Magnet Fund. The GSE Act authorizes the Director of FHFA to temporarily suspend
these allocations in specified circumstances. In November 2008, FHFA suspended allocations for these funds and directed
Fannie Mae and Freddie Mac to not set aside or allocate funds for the Housing Trust Fund and Capital Magnet Fund until
further notice. In July 2013, a lawsuit was filed against FHFA challenging its decision to suspend Fannie Mae’s and Freddie
Mac’s contributions to the Housing Trust Fund. See “Note 19, Commitments and Contingencies” for a description of this
lawsuit.
Executive Compensation. Fannie Mae’s Charter provides that the company has the power to pay compensation to our
executives that the Board of Directors determines is reasonable and comparable with the compensation of executives
performing similar duties in similar businesses, except that a significant portion of potential compensation must be based on
our performance. The GSE Act directs FHFA to prohibit us from providing unreasonable or non-comparable compensation to
our executive officers. FHFA may at any time review the reasonableness and comparability of an executive officer’s
compensation and may require us to withhold any payment to the officer during such review. FHFA is also authorized by the
GSE Act to prohibit or limit certain golden parachute and indemnification payments to directors, officers and certain other
parties. In addition, pursuant to the Stop Trading on Congressional Knowledge Act (the “STOCK Act”) and related
regulations issued by FHFA, our senior executives are prohibited from receiving bonuses during any period of
conservatorship on or after the April 4, 2012 enactment of the law.
In January 2014, FHFA issued a revised final rule relating to the compensation of executive officers (as defined under the
rule), which will become effective on February 27, 2014. The rule, among other things, provides that the Director of FHFA
must prohibit us from providing any compensation to an executive officer that the Director determines is not reasonable or
comparable with compensation for employment in other similar businesses involving similar duties and responsibilities. The
rule also requires the approval of the Director of FHFA before we may enter into any agreement providing compensation in
connection with the termination of an executive officer’s employment. FHFA also issued a revised final rule relating to
golden parachute payments in January 2014, which will become effective on February 27, 2014. The rule generally prohibits
us from making golden parachute payments to any current or former director, officer, employee, controlling stockholder or
agent of the company during any period in which we are in conservatorship, receivership or other troubled condition unless
either a specific exception applies or the Director of FHFA approves the payments. For a description of regulatory and other
legal requirements affecting our executive compensation, see “Executive Compensation—Compensation Discussion and
Analysis—Chief Executive Officer Compensation and 2013 Executive Compensation Program—Impact of Conservatorship
and Other Legal Requirements.”
Fair Lending. The GSE Act requires the Secretary of HUD to assure that the GSEs meet their fair lending
obligations. Among other things, HUD is required to periodically review and comment on the underwriting and appraisal
guidelines of each company to ensure consistency with the Fair Housing Act. HUD is currently conducting such a review.
Capital Adequacy Requirements
The GSE Act establishes capital adequacy requirements. The statutory capital framework incorporates two different
quantitative assessments of capital—a minimum capital requirement and a risk-based capital requirement. The minimum
capital requirement is ratio-based, while the risk-based capital requirement is based on simulated stress test performance. The
GSE Act requires us to maintain sufficient capital to meet both of these requirements in order to be classified as “adequately
capitalized.” However, during the conservatorship, FHFA has suspended our capital classifications and announced that our
existing statutory and FHFA-directed regulatory capital requirements will not be binding. FHFA has advised us that, because
we are under conservatorship, we will not be subject to corrective action requirements that would ordinarily result from our
receiving a capital classification of “undercapitalized.”
Minimum Capital Requirement. Under the GSE Act, we must maintain an amount of core capital that equals or exceeds our
minimum capital requirement. The GSE Act defines core capital as the sum of the stated value of outstanding common stock
(common stock less treasury stock), the stated value of outstanding non-cumulative perpetual preferred stock, paid-in capital,
and retained earnings, as determined in accordance with GAAP. Our minimum capital requirement is generally equal to the
sum of 2.50% of on-balance sheet assets and 0.45% of off-balance sheet obligations. For purposes of minimum capital, FHFA
has directed us to continue reporting loans backing Fannie Mae MBS held by third parties based on 0.45% of the unpaid
principal balance regardless of whether these loans have been consolidated pursuant to accounting rules. FHFA retains
authority under the GSE Act to raise the minimum capital requirement for any of our assets or activities.