Fannie Mae 2013 Annual Report Download - page 61

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or the voiding of completed foreclosures in which MERS appeared in the chain of title. These challenges have focused public
attention on MERS and on how loans are recorded in local land records. As a result, these challenges could negatively affect
MERS’s ability to serve as the mortgagee of record in some jurisdictions, which could cause additional costs and time in the
recordation process and could negatively impact our interest in the loans. These challenges also could result in court
decisions that substantially delay new or pending foreclosures, or void completed foreclosures in certain jurisdictions, which
would require that we re-foreclose on the affected properties, thereby increasing our costs and lengthening the time it takes
for us to foreclose on and dispose of the properties.
In addition, where MERS is the mortgagee of record, it must execute assignments of mortgages, affidavits and other legal
documents in connection with foreclosure proceedings. In April 2011, federal banking regulators and FHFA announced that
they were taking enforcement action against MERS and MERSCORP to address significant weaknesses in, among other
things, oversight, management supervision and corporate governance at MERS and MERSCORP that were uncovered as part
of the regulators’ review of mortgage servicers’ foreclosure processing. Failures by MERS or MERSCORP to apply prudent
and effective process controls and to comply with legal and other requirements could pose counterparty, operational,
reputational and legal risks for us. If investigations or new regulation or legislation restricts servicers’ use of MERS, our
counterparties may be required to record all mortgage transfers in land records, incurring additional costs and time in the
recordation process. At this time, we cannot predict the ultimate outcome of these legal challenges to, or the enforcement
action against, MERS and MERSCORP or the impact on our business, results of operations or financial condition.
Changes in accounting standards and policies can be difficult to predict and can materially impact how we record and
report our financial results.
Our accounting policies and methods are fundamental to how we record and report our financial condition and results of
operations. From time to time, the FASB or the SEC changes the financial accounting and reporting standards or the policies
that govern the preparation of our financial statements. In addition, FHFA provides guidance that affects our adoption or
implementation of financial accounting or reporting standards. These changes can be difficult to predict and expensive to
implement, and can materially impact how we record and report our financial condition and results of operations. We could
be required to apply new or revised guidance retrospectively, which may result in the revision of prior period financial
statements by material amounts. The implementation of new or revised accounting guidance could have a material adverse
effect on our financial results or net worth and result in or contribute to the need for additional draws from Treasury under the
senior preferred stock purchase agreement.
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, we do not expect to
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.