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sales of such securities; changes in the fair value of our assets and liabilities; changes in generally accepted accounting principles (“GAAP”); credit availability; global political risks; natural disasters, terrorist attacks, pandemics or other major disruptive events; information security breaches; and other factors, including those discussed in “Forward-Looking Statements,” “Risk Factors” and elsewhere in this report and in our 2014 Form 10-K. Due to the large size of our guaranty book of business, even small changes in these factors could have a significant impact on our financial results for a particular period.
The information in this section updates and supplements information regarding legislative and regulatory developments set forth in “Business—Housing Finance Reform” and “Business—Our Charter and Regulation of Our Activities” in our 2014 Form 10-K. Also see “Risk Factors” in this report and in our 2014 Form 10-K for a discussion of risks relating to legislative and regulatory matters.
Changes to Our Single-Family Guaranty Fee Pricing
On April 17, 2015, FHFA announced the results of its review of single-family guaranty fees that Fannie Mae and Freddie Mac charge lenders. FHFA determined that current fees, on average, are at an appropriate level and that it would also be appropriate to make some modest changes to our single-family loan level price adjustments, or LLPAs, which are one-time cash fees that we charge at the time we acquire a loan based on the credit characteristics of the loan. Specifically, FHFA directed us to eliminate the 25 basis point adverse market delivery charge that has been assessed on all single-family mortgages purchased by us since 2008, and to attempt to replace the revenue that resulted from the adverse market delivery charge with targeted increases in LLPAs to address various risk-based and access-to-credit considerations. These targeted increases include small increases in LLPAs for loans with both lower LTV ratios and higher FICO credit scores, as well as for loans with certain risk attributes (that is, cash-out refinances, investment properties, loans with secondary financing, and jumbo conforming loans). The fee changes will become effective for whole loans we purchase on or after September 1, 2015 and for loans we acquire in lender swap transactions for Fannie Mae MBS with issue dates on or after September 1, 2015.
In its announcement, FHFA stated that, since all of the guaranty fee changes are small, FHFA does not expect the adjustments to cause any material changes to our loan volume in any of the loan categories and expects the small changes to be revenue neutral. It is possible that, by reducing the differentiation in our pricing for loans with differing risk characteristics, these changes in our LLPAs could increase or decrease our credit risk in the event of a shift in the mix of single-family loans we acquire. For example, pricing increases could result in some of our lender customers retaining lower credit risk loans for their portfolio or delivering them to our competitors instead of delivering the loans to us. For more information on the potential impact of changes to our single-family guaranty fee pricing on our credit risk profile, revenues and business, as well as a discussion of risks associated with FHFA’s ability to direct us to change our guaranty fee pricing and our dependence on FHFA to approve changes to our national LLPAs, see our discussion of the effect of conservatorship on our business activities in “Risk Factors” in our 2014 Form 10-K.
FHFA Communication on Compensation
The Board of Directors of Fannie Mae received a communication on executive compensation from FHFA Director Melvin L. Watt as follows:
“Fannie Mae is authorized to submit a proposal for FHFA review and consideration on executive compensation for the position of Fannie Mae Chief Executive Officer (CEO) to address the Board’s obligation and FHFA’s conservatorship and supervisory objectives of providing for CEO retention; effective succession planning for the CEO position; and continuity, efficiency and stability of operations during this extended period of conservatorship in which the future of the Enterprise is uncertain and the Enterprise is engaged in market transformative work. Any proposal submitted under this authorization must be consistent with meeting the above objectives; may not propose adjustment of CEO compensation before the third anniversary date of the current CEO (June 5, 2015); and may not propose compensation for the CEO that is higher than the 25th percentile of the market, using the agreed-upon comparator group for FHFA evaluation of compensation of Fannie Mae’s executive officers.
A proposal must comply with applicable law, including 12 USC 4518(a) and 4518a, and must be consistent with Fannie Mae’s charter act, 12 USC 1723a(d)(2). In particular, compensation must be reasonable and comparable with similar positions at similar companies and must take into consideration Fannie Mae’s status in conservatorship and FHFA’s statutory power as conservator to preserve and conserve assets, 12 USC 4617(b). Recommendations must include pay for performance aspects and may not include a ‘bonus.’”