Fannie Mae 2014 Annual Report Download - page 38

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Capital. The GSE Act provides FHFA with broad authority to increase the level of our required minimum capital and to
establish capital or reserve requirements for specific products and activities. FHFA also has broad authority to establish risk-
based capital requirements, to ensure that we operate in a safe and sound manner and maintain sufficient capital and reserves.
During the conservatorship, FHFA has suspended our capital classifications. We continue to submit capital reports to FHFA
during the conservatorship, and FHFA continues to monitor our capital levels. We describe our capital requirements below
under “Capital Adequacy Requirements.”
Portfolio. The GSE Act requires FHFA to establish standards governing our portfolio holdings, to ensure that they are backed
by sufficient capital and consistent with our mission and safe and sound operations. FHFA is also required to monitor our
portfolio and, in some circumstances, may require us to dispose of or acquire assets. In 2010, FHFA published a final rule
adopting, as the standard for our portfolio holdings, the portfolio limits specified in the senior preferred stock purchase
agreement described under “Conservatorship and Treasury Agreements—Treasury Agreements—Covenants under Treasury
Agreements,” as it may be amended from time to time. The rule is effective for as long as we remain subject to the terms and
obligations of the senior preferred stock purchase agreement.
New Products and Activities. The GSE Act requires us to request FHFA’s approval before initially offering any new product,
subject to certain exceptions. The GSE Act also requires us to provide FHFA with written notice before commencing any new
activity. In July 2009, FHFA published an interim final rule implementing these provisions of the GSE Act. Subsequently, the
then-Acting Director of FHFA concluded that permitting us to engage in new products was inconsistent with the goals of the
conservatorship. He therefore instructed us not to submit requests for approval of new products under the interim final rule.
Receivership. Under the GSE Act, FHFA must place us into receivership if it determines that our assets are less than our
obligations for 60 days, or we have not been paying our debts as they become due for 60 days. FHFA has notified us that the
measurement period for any mandatory receivership determination with respect to our assets and liabilities would commence
no earlier than the SEC public filing deadline for our quarterly or annual financial statements and would continue for 60
calendar days thereafter. FHFA has advised us that if, during that 60-day period, we receive funds from Treasury in an
amount at least equal to the deficiency amount under the senior preferred stock purchase agreement, the Director of FHFA
will not make a mandatory receivership determination.
In addition, we could be put into receivership at the discretion of the Director of FHFA at any time for other reasons set forth
in the GSE Act. The statutory grounds for discretionary appointment of a receiver include: a substantial dissipation of assets
or earnings due to unsafe or unsound practices; the existence of an unsafe or unsound condition to transact business; an
inability to meet our obligations in the ordinary course of business; a weakening of our condition due to unsafe or unsound
practices or conditions; critical undercapitalization; undercapitalization and no reasonable prospect of becoming adequately
capitalized; the likelihood of losses that will deplete substantially all of our capital; or by consent.
In June 2011, FHFA issued a final rule establishing a framework for conservatorship and receivership operations for the
GSEs, which became effective in July 2011. The rule implements and supplements the procedures and processes set forth in
the GSE Act, and does not seek to anticipate or predict future conservatorships or receiverships. For example, the final rule
clarifies that:
• the powers of the conservator or receiver include continuing our mission and ensuring that our operations foster
liquid, efficient, competitive and resilient national housing finance markets;
• the conservator or receiver may disaffirm or repudiate any contract or lease to which we are a party for up to
18 months following the appointment of a conservator or receiver;
• we are prohibited from making capital distributions while in conservatorship unless authorized by the Director of
FHFA; and
• claims by current or former shareholders (including securities litigation claims) would receive the lowest priority in
a receivership, behind: (1) administrative expenses of the receiver (or an immediately preceding conservator),
(2) our other general or senior liabilities, and (3) obligations subordinated to those of general creditors.
The rule also provides that FHFA, as conservator, will not pay securities litigation claims against us during conservatorship,
unless the Director of FHFA determines it is in the interest of the conservatorship.
Prudential Management and Operational Standards. As required by the GSE Act, in June 2012, FHFA published a final rule
establishing prudential standards relating to the management and operations of Fannie Mae, Freddie Mac and the FHLBs in
the following ten areas: (1) internal controls and information systems; (2) independence and adequacy of internal audit
systems; (3) management of market risk exposure; (4) management of market risk—measurement systems, risk limits, stress
testing, and monitoring and reporting; (5) adequacy and maintenance of liquidity and reserves; (6) management of asset and
investment portfolio growth; (7) investments and acquisitions of assets; (8) overall risk management processes;