Fannie Mae 2004 Annual Report Download - page 49

Agreements with Dealers. We enter into agreements with dealers under which they commit to deliver pools
of mortgages to us at an agreed-upon date and price. We commit to sell Fannie Mae MBS based in part on
these commitments. If a dealer defaults in its commitment obligation, it could cause us to default in our
obligation to deliver the Fannie Mae MBS on our commitment date or may force us to replace the loans at a
higher cost in order to meet our commitment.
Liquid Investment Portfolio Issuers. The primary credit exposure associated with investments held in our
liquid investment portfolio is that the issuers of these investments will not repay principal and interest in
accordance with the contractual terms. The failure of these issuers to make these payments could have a
material adverse effect on our business results.
Derivatives Counterparties. If a derivatives counterparty defaults on payments due to us, we may need to
enter into a replacement derivative contract with a different counterparty at a higher cost or we may be unable
to obtain a replacement contract. As of December 31, 2004, we had 23 interest rate and foreign currency
derivatives counterparties. Eight of these counterparties accounted for approximately 83% of the total
outstanding notional amount of our derivatives contracts, and each of these eight counterparties accounted for
between approximately 7% and 14% of the total outstanding notional amount. The insolvency of one of our
largest derivatives counterparties combined with an adverse move in the market before we are able to transfer
or replace the contracts could adversely affect our financial condition and results of operations. A discussion
of how we manage the credit risk posed by our derivatives transactions and a detailed description of our
derivatives credit exposure is contained in “Item 7—MD&A—Risk Management—Credit Risk Management—
Institutional Counterparty Credit Risk Management—Derivatives Counterparties.”
Our ability to operate our business, meet our obligations and generate net interest income depends
primarily on our ability to issue substantial amounts of debt frequently and at attractive rates.
The issuance of short-term and long-term debt securities in the domestic and international capital markets is
our primary source of funding for purchasing assets for our mortgage portfolio and repaying or refinancing our
existing debt. Moreover, our primary source of revenue is the net interest income we earn from the difference,
or spread, between our borrowing costs and the return that we receive on our mortgage assets. Our ability to
obtain funds through the issuance of debt, and the cost at which we are able to obtain these funds, depends on
many factors, including:
• our corporate and regulatory structure, including our status as a GSE;
• legislative or regulatory actions relating to our business, including any actions that would affect our GSE
status;
• rating agency actions relating to our credit ratings;
• our financial results and changes in our financial condition;
• significant events relating to our business or industry;
• the public’s perception of the risks to and financial prospects of our business or industry;
• the preferences of debt investors;
• the breadth of our investor base;
• prevailing conditions in the capital markets;
• interest rate fluctuations; and
• general economic conditions in the United States and abroad.
In addition, the other GSEs, such as Freddie Mac and the Federal Home Loan Banks, also issue significant
amounts of AAA-rated agency debt to fund their operations, which may negatively impact the prices we are
able to obtain for these securities.
Approximately 47% of the Benchmark Notes we have issued in 2006 were purchased by non-U.S. investors,
including both private institutions and non-U.S. governments and government agencies. Accordingly, a significant
reduction in the purchase of our debt securities by non-U.S. investors could have a material adverse effect on
both the amount of debt securities we are able to issue and the price we are able to obtain for these securities.
Many of the factors that affect the amount of our securities that foreign investors purchase, including economic
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