Fannie Mae 2010 Annual Report Download - page 159

• Addition of new requirements for financial information verification before borrowers can be offered a
loan modification outside of HAMP;
• Introduction of a Unique Hardship policy to allow servicers to grant forbearance, and a provision for
credit bureau reporting relief, to borrowers who face difficulty maintaining timely payments due to an
event or temporary financial hardship that has been classified by us as a unique hardship;
• Adjustments to foreclosure time frames and notice of compensatory fees for breach of servicing
obligations, which are designed to hold servicers accountable for their servicing requirements and aim to
improve servicer performance and costly delays in foreclosure proceedings; and
• Introduction of the Second Lien Modification Program (2MP), which is designed to work in tandem with
HAMP for first liens to create a comprehensive solution to help borrowers achieve greater affordability by
lowering payments on both first and second lien mortgage loans for borrowers whose second lien loan is
owned by Fannie Mae.
On September 29, 2010, Congress passed a continuing resolution that, among other things, extended the
current GSE loan limits for high cost areas through September 30, 2011. See “Business—Our Charter and
Regulation of Our Activities—Charter Act—Loan Standards” for additional information on our loan limits.
Single-Family Portfolio Diversification and Monitoring
Diversification within our single-family mortgage credit book of business by product type, loan characteristics
and geography is an important factor that influences credit quality and performance and may reduce our credit
risk. We also review the payment performance of loans in order to help identify potential problem loans early
in the delinquency cycle and to guide the development of our loss mitigation strategies.
The profile of our guaranty book of business is comprised of the following key loan attributes:
—LTV ratio. LTV ratio is a strong predictor of credit performance. The likelihood of default and the
gross severity of a loss in the event of default are typically lower as the LTV ratio decreases. This also
applies to the estimated mark-to-market LTV ratios, particularly those over 100%, as this indicates that
the borrower’s mortgage balance exceeds the property value.
—Product type. Certain loan product types have features that may result in increased risk. Generally,
intermediate-term, fixed-rate mortgages exhibit the lowest default rates, followed by long-term, fixed-
rate mortgages. ARMs and balloon/reset mortgages typically exhibit higher default rates than fixed-rate
mortgages, partly because the borrower’s future payments may rise, within limits, as interest rates
change. Negative-amortizing and interest-only loans also default more often than traditional fixed-rate
mortgage loans.
—Number of units. Mortgages on one-unit properties tend to have lower credit risk than mortgages on
two-, three- or four-unit properties.
—Property type. Certain property types have a higher risk of default. For example, condominiums
generally are considered to have higher credit risk than single-family detached properties.
—Occupancy type. Mortgages on properties occupied by the borrower as a primary or secondary
residence tend to have lower credit risk than mortgages on investment properties.
—Credit score. Credit score is a measure often used by the financial services industry, including our
company, to assess borrower credit quality and the likelihood that a borrower will repay future
obligations as expected. A higher credit score typically indicates lower credit risk.
—Loan purpose. Loan purpose indicates how the borrower intends to use the funds from a mortgage
loan. Cash-out refinancings have a higher risk of default than either mortgage loans used for the
purchase of a property or other refinancings that restrict the amount of cash returned to the borrower.
—Geographic concentration. Local economic conditions affect borrowers’ ability to repay loans and the
value of collateral underlying loans. Geographic diversification reduces mortgage credit risk.
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