Fannie Mae 2014 Annual Report Download - page 40

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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.
Risk-Based Capital Requirement. The GSE Act requires FHFA to establish risk-based capital requirements for Fannie Mae
and Freddie Mac, to ensure that we operate in a safe and sound manner. Existing risk-based capital regulation under the GSE
Act ties our capital requirements to the risk in our book of business, as measured by a stress test model. The stress test
simulates our financial performance over a ten-year period of severe economic conditions characterized by both extreme
interest rate movements and high mortgage default rates. FHFA has stated that it does not intend to publish our risk-based
capital level during the conservatorship and has discontinued stress test simulations under the existing rule. We continue to
submit detailed profiles of our books of business to FHFA to support FHFA’s monitoring of our business activity and their
research into future risk-based capital rules.
Critical Capital Requirement. The GSE Act also establishes a critical capital requirement, which is the amount of core capital
below which we would be classified as “critically undercapitalized.” Under the GSE Act, such classification is a discretionary
ground for appointing a conservator or receiver. Our critical capital requirement is generally equal to the sum of 1.25% of on-
balance sheet assets and 0.25% of off-balance sheet obligations. FHFA has directed us, for purposes of critical capital, to
continue reporting loans backing Fannie Mae MBS held by third parties based on 0.25% of the unpaid principal balance,
notwithstanding our consolidation of substantially all of the loans backing these securities. FHFA has stated that it does not
intend to publish our critical capital level during the conservatorship.
Housing Goals and Duty to Serve Underserved Markets
Since 1993, we have been subject to housing goals. The structure of our housing goals changed in 2010 as a result of the
2008 Reform Act. The 2008 Reform Act also created a new duty for us to serve three underserved markets, which we discuss
below.
Housing Goals for 2012 to 2014
In November 2012, FHFA published a final rule establishing the following single-family home purchase and refinance
housing goal benchmarks for 2012 to 2014 for Fannie Mae and Freddie Mac. A home purchase mortgage may be counted
toward more than one home purchase benchmark.
• Low-Income Families Home Purchase Benchmark: At least 23% of our acquisitions of single-family owner-
occupied purchase money mortgage loans must be affordable to low-income families (defined as income equal to or
less than 80% of area median income).
• Very Low-Income Families Home Purchase Benchmark: At least 7% of our acquisitions of single-family owner-
occupied purchase money mortgage loans must be affordable to very low-income families (defined as income equal
to or less than 50% of area median income).
• Low-Income Areas Home Purchase Goal Benchmark: The benchmark level for our acquisitions of single-family
owner-occupied purchase money mortgage loans for families in low-income areas is set annually by notice from
FHFA, based on the benchmark level for the low-income areas home purchase subgoal (below), plus an adjustment
factor reflecting the additional incremental share of mortgages for moderate-income families (defined as income