Fannie Mae 2010 Annual Report Download - page 19

Whether the loans we acquire in the future exhibit an overall credit profile similar to our acquisitions since
January 1, 2009 will depend on a number of factors, including our future eligibility standards and those of
mortgage insurers, the percentage of loan originations representing refinancings, our future objectives, and
market and competitive conditions.
Beginning in 2008, we made changes to our pricing and eligibility standards and underwriting that were
intended to more accurately reflect the risk in the housing market and to significantly reduce our acquisitions
of loans with higher-risk attributes. These changes included the following:
• Established a minimum FICO credit score and reduced maximum debt-to-income ratio for most loans;
• Limited or eliminated certain loan products with higher-risk characteristics, including discontinuing the
acquisition of newly originated Alt-A loans, except for those that represent the refinancing of an existing
Alt-A Fannie Mae loan (we may also continue to selectively acquire seasoned Alt-A loans that meet
acceptable eligibility and underwriting criteria; however, we expect our acquisitions of Alt-A mortgage
loans to continue to be minimal in future periods);
• Updated our comprehensive risk assessment model in Desktop Underwriter», our proprietary automated
underwriting system, and implemented a comprehensive risk assessment worksheet to assist lenders in the
manual underwriting of loans;
• Increased our guaranty fee pricing to better align risk and pricing;
• Updated our policies regarding appraisals of properties backing loans; and
• Established a national down payment policy requiring borrowers to have a minimum down payment (or
minimum equity, for refinances) of 3%, in most cases.
If we had applied our current pricing and eligibility standards and underwriting to loans we acquired in 2005
through 2008, our losses on loans acquired in those years would have been lower, although we would still
have experienced losses due to the rise and subsequent sharp decline in home prices and increased
unemployment.
Expectations Regarding Credit Losses
The single-family credit losses we realized in 2009 and 2010, combined with the amounts we have reserved
for single-family credit losses as of December 31, 2010, total approximately $110 billion. The vast majority of
these losses are attributable to single-family loans we purchased or guaranteed from 2005 through 2008.
While loans we acquired in 2005 through 2008 will give rise to additional credit losses that we have not yet
realized, we estimate that we have reserved for the substantial majority of the remaining losses. While we
believe our results of operations have already reflected a substantial majority of the credit losses we have yet
to realize on these loans, we expect that defaults on these loans and the resulting charge-offs will occur over a
period of years. In addition, given the large current and anticipated supply of single-family homes in the
market, we anticipate that it will take years before our REO inventory approaches pre-2008 levels.
We show how we calculate our realized credit losses in “Table 14: Credit Loss Performance Metrics.” Our
reserves for credit losses consist of (1) our allowance for loan losses, (2) our allowance for accrued interest
receivable, (3) our allowance for preforeclosure property taxes and insurance receivables, and (4) our reserve
for guaranty losses (collectively, our “total loss reserves”), plus the portion of fair value losses on loans
purchased out of MBS trusts reflected in our consolidated balance sheets that we estimate represents
accelerated credit losses we expect to realize. For more information on our reserves for credit losses, please
see “Table 11: Total Loss Reserves.”
The fair value losses that we consider part of our reserves are not included in our “total loss reserves.” The
majority of the fair value losses were recorded prior to our adoption of the new accounting standards in 2010.
Upon our acquisition of credit-impaired loans out of unconsolidated MBS trusts, we recorded fair value loss
charge-offs against our reserve for guaranty losses to the extent that the acquisition cost of these loans
exceeded their estimated fair value. We expect to realize a portion of these fair value losses as credit losses in
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