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OFHEO Classifies Fannie Mae As Significantly Undercapitalized For Fourth Quarter 2004 And Adequately Capitalized For First Quarter 2005

May 19, 2005

WASHINGTON, D.C. — Armando Falcon, Jr., Director of the Office of Federal Housing Enterprise Oversight (OFHEO), safety and soundness regulator for Fannie Mae and Freddie Mac (the Enterprises), has classified Fannie Mae as significantly undercapitalized as of December 31, 2004 and adequately capitalized as of March 31, 2005. /1

Fannie Mae’s capital classification is based on estimated financial information provided by the Enterprise and the application of accounting policies currently under review by OFHEO. The capital classification also utilizes current best estimates as certified and represented by Fannie Mae management of its financial condition, including adjustments for additional accounting errors. This capital classification is subject to change as additional information becomes available; such as Fannie Mae’s certification of its financial statements; and, OFHEO’s completion of its review of Fannie Mae’s accounting policies and practices.

Both the release of the December 31, 2004 classification, and the early release for the March 31, 2005 capital classification are a result of the circumstances surrounding the review of Fannie Mae’s accounting policies and practices. Estimates provided by Fannie Mae of the accounting errors’ impact on capital required OFHEO’s review and analysis to assess the year-end capital impact. Further, as a result of ongoing monitoring and the filing of the March 31, 2005 capital position by Fannie Mae, a more accurate assessment of the capital adequacy can now be made.

December 31, 2004 Classification

As of December 31, 2004, based upon the information provided by Fannie Mae and adjustments for the estimated accounting errors’ impact on capital, Fannie Mae’s estimated core capital exceeded the minimum capital requirement by a small margin. However, given the significant control weaknesses and the remaining uncertainties associated with the ongoing review of Fannie Mae’s financial controls and accounting policies, a significant risk remains that accounting adjustments could deplete Fannie Mae’s core capital to an amount below the required minimum for this time period. The small surplus at year-end 2004 leaves little room for discrepancies in the estimated capital position. Accordingly, OFHEO has retained the significantly undercapitalized position as of December 31, 2004. March 31, 2005 Classification

As of March 31, 2005, based upon the information provided by Fannie Mae and adjustments for the estimated accounting errors’ impact on capital, Fannie Mae has achieved an estimated $4 billion surplus through earnings retention and asset sales. This projected surplus over the minimum capital requirement is sufficient to absorb uncertainties in the estimated impact to capital of the accounting errors, based on current information. Accordingly, OFHEO has determined that Fannie Mae is adequately capitalized as of March 31, 2005.

Continuing Capital Conditions

While Fannie Mae’s capital classification at March 31, 2005 is adequately capitalized, Fannie Mae remains subject to the requirements imposed by the Agreement dated September 27, 2004, including the supplement dated March 7, 2005, and the Capital Restoration Plan dated February 10, 2005, which require Fannie Mae to achieve a 30% capital surplus over the minimum capital requirement by September 30, 2005. OFHEO is actively monitoring Fannie Mae’s compliance with the Capital Restoration Plan on a weekly basis. At this time, incorporating estimated accounting impacts, Fannie Mae remains on target and has adequate contingencies in place to achieve the required 30% surplus over minimum capital by September 30, 2005.


/1-- The Federal Housing Enterprises Financial Safety and Soundness Act of 1992 requires the OFHEO Director to determine the capital level and classification of the Enterprises not less than quarterly, and to report the results to Congress. OFHEO classifies the Enterprises as adequately capitalized, undercapitalized, significantly undercapitalized or critically undercapitalized. The Enterprises are required by Federal statute to meet both minimum and risk-based capital standards to be classified as adequately capitalized.

Source: OFHEO



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