The 'AAA' rating on the senior debt of Fannie Mae reflects the company's very strong business franchise, extraordinary efficiency, very good asset quality, and adequate risk-adjusted capitalization. Fannie Mae is engaged in a thorough overhaul of its internal processes and controls as a result of an agreement entered into with its regulator, The Office of Housing Enterprise Oversight (OFHEO), which had expressed concerns over accounting practices at the company. It is also building its regulatory capital position to reach a target of a 30% surplus over the minimum level, in part through shrinkage of the balance sheet. Challenges include long-term margin pressure on Fannie Mae's portfolio of mortgages and pricing pressure in the mortgage guaranty business; a leverage position that
