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Federal National Mortgage Association (FNMA) Risk Analysis
Risk Overview Q3, 2022
Source: the company's latest filing for the period ended Sep 30, 2022, filed Nov 08, 2022
Risk Change Over Time
- Economy & Political Environment - Risk 1Our business and financial results are affected by general economic conditions, including home prices and employment trends, and changes in economic conditions or financial markets may materially adversely affect our business and financial condition.
In general, a prolonged period of slow growth in the U.S. economy or any deterioration in general economic conditions or financial markets could materially adversely affect our results of operations, net worth and financial condition. Our business is significantly affected by the status of the U.S. economy, including home prices and employment trends, as well as economic output levels, interest and inflation rates, and shifts in fiscal and monetary policies. As described in "MD&A-Key Market Economic Indicators" in this report, we currently expect that a modest recession is likely to occur beginning in the first quarter of 2023, resulting in an increase in the unemployment rate. In addition, home prices declined slightly on a national basis in the third quarter of 2022, and we expect additional home price declines in the fourth quarter of 2022 and in 2023. In recent years, the Federal Reserve has purchased a significant amount of mortgage-backed securities issued by us, Freddie Mac and Ginnie Mae. The Federal Reserve began to taper these purchases in November 2021 and concluded its asset purchase program in March 2022. In March 2022, the Federal Reserve stated that it would reinvest principal payments from its holdings of both agency debt and agency mortgage-backed securities into agency mortgage-backed securities, and that it expected to begin reducing its holdings of agency debt and agency mortgage-backed securities. In May 2022, the Federal Reserve announced its plans to reduce its securities holdings over time by reinvesting principal payments from agency debt and agency mortgage-backed securities only to the extent those payments exceed monthly caps; the cap was initially set at $17.5 billion per month beginning on June 1, 2022, and increased to $35 billion per month in September 2022. In addition, the Federal Reserve has raised the target range for the federal funds rate several times this year to address inflation, and in November 2022 stated that it anticipates that ongoing increases in the target range will be appropriate. The strength in inflation also contributed to the sharp rise in mortgage rates in 2022, and mortgage rates may continue to rise. The increase in mortgage interest rates has already led to a slowdown in housing demand and a reduction in our business volume. Due to the recent sharp rise in interest rates and increases in mortgage spreads, we have been issuing MBS with higher coupon yields. Demand for, and liquidity of, these higher MBS coupon yields has been lower than typical demand and liquidity for our MBS. Further rate increases would likely further reduce our business volume and demand for and the liquidity of our MBS, which could adversely affect our results of operations, net worth and financial condition. Further rate increases also could result in greater home price declines, which also could adversely affect our results of operations, net worth and financial condition. Global economic conditions can also adversely affect our business and financial results. Changes or volatility in market conditions resulting from deterioration in or uncertainty regarding global economic conditions can adversely affect the value of our assets, which could materially adversely affect our results of operations, net worth and financial condition. Differing rates of economic recovery from the COVID-19 pandemic around the world along with continued dislocations in supply chains remain a concern for policy makers and financial markets. To the extent global economic conditions negatively affect the U.S. economy, they also could negatively affect the credit performance of the loans in our book of business. Volatility or uncertainty in global or domestic political conditions also can significantly affect economic conditions and financial markets. Global or domestic political unrest also could affect economic growth and financial markets. For example, the Russian war in Ukraine and related economic sanctions imposed on Russia, as well as any further actions by Russia, the United States or others relating to this conflict, may further impact the global economy and financial markets, which could further increase inflationary pressure and interest rates, as well as negatively affect economic growth and result in disruptions in the financial markets. We describe in "Risk Factors" in our 2021 Form 10-K the risks to our business posed by changes in interest rates and changes in spreads. In addition, future changes or disruptions in financial markets could significantly change the amount, mix and cost of funds we obtain, as well as our liquidity position.
Risk Highlights Q3, 2022
Risk Word Cloud
Risk Factors Full Breakdown - Total Risks 36
- Share Price & Shareholder Rights - Risk 1Our business activities are significantly affected by the conservatorship and the senior preferred stock purchase agreement.
In conservatorship our business is not managed with a strategy to maximize shareholder returns while fulfilling our mission. Our directors have no fiduciary duties to any person or entity except to the conservator. Accordingly, our directors are not obligated to consider the interests of the company, the holders of our equity or debt securities, or the holders of Fannie Mae MBS in making or approving a decision unless specifically directed to do so by the conservator. The Supreme Court’s opinion in Collins v. Yellen in June 2021 included an expansive interpretation of FHFA’s authority as conservator under the Housing and Economic Recovery Act of 2008 (“HERA”), noting that “when the FHFA acts as a conservator, it may aim to rehabilitate the regulated entity in a way that, while not in the best interests of the regulated entity, is beneficial to the Agency and, by extension, the public it serves.” As conservator, FHFA can direct us to enter into contracts or enter into contracts on our behalf, and generally has the power to transfer or sell any of our assets or liabilities. FHFA can prevent us from engaging in business activities or transactions that we believe would benefit our business and financial results. For example, because FHFA can direct us to make changes to our guaranty fee pricing, our ability to address changing market conditions, pursue certain strategic objectives, or manage the mix of loans we acquire is constrained. Additionally, FHFA may require us to undertake activities that are costly or difficult to implement. With FHFA’s broad powers as conservator, changes in leadership at FHFA, including those resulting from a change in the Administration, could result in significant changes to the goals FHFA establishes for us and could have a material impact on our business and financial results. In Collins v. Yellen, the Supreme Court concluded that the for-cause restriction on the President’s power to remove the FHFA Director under HERA violates the Constitution’s separation of powers. Accordingly, the Supreme Court held that the President has the power to remove the Director of FHFA for any reason, not just for cause. Even if we are released from conservatorship, we remain subject to the terms of the senior preferred stock purchase agreement with Treasury, under which we issued the senior preferred stock and warrant. The senior preferred stock purchase agreement can only be canceled or modified with the consent of Treasury. The agreement includes a number of covenants that significantly restrict our business activities. Additionally, under our senior preferred stock purchase agreement, we are subject to a $300 billion debt limit, which will decrease to $270 billion as of December 31, 2022. The unpaid principal balance of our aggregate indebtedness was $202.5 billion as of December 31, 2021. Because of our debt limit, our business activities may be constrained. For more information about the covenants in the senior preferred stock purchase agreement and their potential impact on our business, see “Business—Conservatorship, Treasury Agreements and Housing Finance Reform—Treasury Agreements—Covenants under Treasury Agreements.”
- Share Price & Shareholder Rights - Risk 2The conservatorship and agreements with Treasury adversely affect our common and preferred shareholders.
The material adverse effects of the conservatorship on our shareholders under our agreements with Treasury include the following: No voting rights during conservatorship. During conservatorship, our common shareholders do not have the ability to elect directors or to vote on other matters unless the conservator delegates this authority to them. No dividends to common or preferred shareholders, other than to Treasury. Our conservator announced in September 2008 that we would not pay any dividends on the common stock or on any series of preferred stock, other than the senior preferred stock, while we are in conservatorship. In addition, under the terms of the senior preferred stock purchase agreement, dividends may not be paid to common or preferred shareholders (other than on the senior preferred stock) without the prior written consent of Treasury, regardless of whether we are in conservatorship. Our profits directly increase the liquidation preference of Treasury’s senior preferred stock and, once they exceed our capital reserve amount, will be payable to Treasury as dividends. The senior preferred stock ranks senior to our common stock and all other series of our preferred stock, as well as any capital stock we issue in the future, as to both dividends and distributions upon liquidation. Accordingly, if we are liquidated, the senior preferred stock is entitled to its then-current liquidation preference, before any distribution is made to the holders of our common stock or other preferred stock. See “Business—Conservatorship, Treasury Agreements and Housing Finance Reform—Treasury Agreements—Senior Preferred Stock” for more information on the aggregate liquidation preference of the senior preferred stock. Exercise of the Treasury warrant would substantially dilute the investment of current shareholders. If Treasury exercises its warrant to purchase shares of our common stock equal to 79.9% of the total number of shares of our common stock outstanding on a fully diluted basis, the ownership interest in the company of our then-existing common shareholders will be substantially diluted. We are not managed for the benefit of shareholders. Because we are in conservatorship, we are not managed with a strategy to maximize shareholder returns. The senior preferred stock purchase agreement, senior preferred stock and warrant can only be canceled or modified with the consent of Treasury. For additional description of the conservatorship and our agreements with Treasury, see “Business—Conservatorship, Treasury Agreements and Housing Finance Reform.”
- Share Price & Shareholder Rights - Risk 3Our issuance of UMBS and structured securities backed by Freddie Mac-issued securities exposes us to operational and counterparty credit risk.
When we resecuritize Freddie Mac-issued UMBS or other Freddie Mac securities, our guaranty of principal and interest extends to the underlying Freddie Mac security. Although we have an indemnification agreement with Freddie Mac, in the event Freddie Mac were to fail (for credit or operational reasons) to make a payment due on its securities underlying a Fannie Mae-issued structured security, we would be obligated under our guaranty to fund any shortfall and make the entire payment on the related Fannie Mae-issued structured security on that payment date. Our pricing does not currently reflect any incremental credit, liquidity or operational risk associated with our guaranty of resecuritized Freddie Mac securities, or capital requirements related to those exposures. As a result, a failure by Freddie Mac to meet its obligations under the terms of its securities that back structured securities we issue could have a material adverse effect on our earnings and financial condition, and we could be dependent on Freddie Mac and on the senior preferred stock purchase agreements that we and Freddie Mac each have with Treasury to avoid a liquidity event or a default under our guaranty. We expect this risk exposure to increase as we issue more structured securities backed directly or indirectly by Freddie Mac-issued securities going forward. In addition, UMBS have created significant interdependence between the single-family mortgage securitization programs of Fannie Mae and Freddie Mac. Accordingly, the market value and liquidity profile of single-family Fannie Mae MBS could be affected by financial and operational incidents relating to Freddie Mac, even if those incidents do not directly relate to Fannie Mae or Fannie Mae MBS. Similarly, any disruption in Freddie Mac’s securitization activities or any adverse events affecting Freddie Mac’s significant mortgage sellers and servicers also could adversely affect the market value of single-family Fannie Mae MBS.
- Share Price & Shareholder Rights - Risk 4An active trading market in our equity securities may cease to exist, which would adversely affect the market price and liquidity of our common and preferred stock.
Our common stock and preferred stock are now traded exclusively in the over-the-counter market, and are not currently listed on any securities exchanges. We cannot predict the actions of market makers, investors or other market participants, and can offer no assurances that the market for our securities will be stable. If there is no active trading market in our equity securities, the market price and liquidity of the securities will be adversely affected. In addition, the market price of our common stock and preferred stock is subject to significant volatility, which may be due to other factors described in these “Risk Factors,” as well as speculation regarding our future, economic and political conditions generally, liquidity in the over-the-counter market in which our stock trades, and other factors, many of which are beyond our control. Such factors could cause the market price of our common stock and preferred stock to decline significantly, which may result in significant losses to holders of our common stock and preferred stock.
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