Fannie Mae 2013 Annual Report Download - page 42

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Bank Capital and Liquidity Standards
Although we are not subject to banking regulations, our business may be affected by changes to the capital and liquidity
requirements applicable to U.S. banks. The capital and liquidity regimes for the U.S. banking industry are currently
undergoing significant changes as a result of actions by international bank regulators. In December 2010, the Basel
Committee on Banking Supervision issued a set of revisions to the international capital requirements. These revisions, known
as Basel III, generally narrow the definition of capital that can be used to meet risk-based standards and raise the amount of
capital that must be held. Basel III also introduces new quantitative liquidity requirements. In July 2013, U.S. banking
regulators issued a final regulation implementing Basel III’s capital standards. U.S. banking regulators also issued a proposed
regulation in October 2013 setting minimum liquidity standards generally in accordance with Basel III standards. See “Risk
Factors” for a discussion of this proposed rule and how, if it is adopted as currently proposed, it could materially adversely
affect demand by banks for our debt and MBS securities in the future, as well as how Basel III could otherwise affect our
company and the future business practices of our customers and counterparties.
In addition, although we are not subject to bank capital or liquidity requirements, any revised framework for GSE standards
may be based on bank requirements, particularly if the GSEs are deemed to be systemically important financial companies
subject to Federal Reserve oversight.
Potential Changes to Our Single-Family Guaranty Fee Pricing
In December 2013, FHFA directed us and Freddie Mac to increase our base single-family guaranty fees for all mortgages by
10 basis points. FHFA also directed us and Freddie Mac to make changes to our single-family loan level price adjustments,
which are one-time cash fees that we charge at the time we initially acquire a loan based on the credit characteristics of the
loan. These changes to our single-family loan level price adjustments consist of: (1) eliminating the current 25 basis point
adverse market delivery charge, which has been assessed on all single-family mortgages purchased by us since 2008, for all
loans except those secured by properties located in Connecticut, Florida, New Jersey and New York, due to the significantly
higher foreclosure carrying costs in these states; and (2) implementing changes to our upfront fees for single-family loans to
better align pricing with the credit risk characteristics of the borrower. FHFA’s December 2013 directive stated that these
price changes would be effective on March 1, 2014 for whole loan commitments and on April 1, 2014 for loans exchanged
for Fannie Mae MBS; however, in January 2014, FHFA directed us and Freddie Mac to delay implementation of these
guaranty fee changes. FHFA Director Watt stated that he intends to conduct a thorough evaluation of the proposed changes
and their likely impact as expeditiously as possible.
FHFA Advisory Bulletin Regarding Framework for Adversely Classifying Loans
In April 2012, FHFA issued Advisory Bulletin AB 2012-02, “Framework for Adversely Classifying Loans, Other Real Estate
Owned, and Other Assets and Listing Assets for Special Mention” (the “Advisory Bulletin”), which is applicable to Fannie
Mae, Freddie Mac and the Federal Home Loan Banks. The Advisory Bulletin establishes guidelines for adverse classification
and identification of specified single-family and multifamily assets and off-balance sheet credit exposures. The Advisory
Bulletin indicates that this guidance considers and is generally consistent with the Uniform Retail Credit Classification and
Account Management Policy issued by the federal banking regulators in June 2000.
Among other requirements, this Advisory Bulletin requires that we classify the portion of an outstanding single-family loan
balance in excess of the fair value of the underlying property, less costs to sell and adjusted for any credit enhancements, as a
“loss” no later than when the loan becomes 180 days delinquent, except in certain specified circumstances (such as those
involving properly secured loans with an LTV ratio equal to or less than 60%). For multifamily loans, the Advisory Bulletin
requires that any portion of a loan balance that exceeds the amount secured by the fair value of the collateral, less costs to
sell, for which there is no available and reliable source of repayment other than the sale of the underlying real estate
collateral, to be classified as a “loss.” The Advisory Bulletin also requires us to charge off the portion of the loan classified as
a “loss.” The Advisory Bulletin specifies that, if we subsequently receive full or partial payment of a previously charged-off
loan, we may report a recovery of the amount, either through our loss reserves or as a reduction in our foreclosed property
expenses. In May 2013, FHFA issued an additional Advisory Bulletin clarifying the implementation timeline for AB 2012-02,
requiring that: (1) the asset classification provisions of AB 2012-02 should be implemented by January 1, 2014; and (2) the
charge-off provisions of AB 2012-02 should be implemented no later than January 1, 2015.
We establish an allowance for loan losses against our loans either through our collective loss reserve or our loss reserve for
individually impaired loans. Thus, at the time single-family loans become 180 days delinquent, we have already established
an allowance for loan losses against them. The Advisory Bulletin requires us to change our practice for determining when a
loan is deemed uncollectible to the date the loan is classified as a “loss” as described above. This is a change from our current
practice for determining when a loan is deemed to be uncollectible, which is based on historical data and results in a loan