Fannie Mae 2001 Annual Report Download - page 38

$314 billion of single-family loans in portfolio or underlying
MBS. Seven mortgage insurance companies, all rated AA or
higher by Standard & Poor’s, provided 96 percent of the
total coverage.
The primary credit risk associated with recourse transactions
is that lenders will be unable to fulfill their obligations to
absorb losses on mortgage loans that default. At
December 31, 2001, the unpaid balance of single-family
loans where Fannie Mae has recourse to lenders for losses
totaled an estimated $42 billion. The quality of these
counterparties is high. Fifty-nine percent of the $42 billion
is covered by recourse agreements with investment grade
counterparties. Fannie Mae also mitigates the risk associated
with recourse transactions through various means, including
requiring some lenders to pledge collateral to secure their
obligations. Fannie Mae held $247 million in collateral
directly or through custodians on single-family lender
recourse at December 31, 2001. In addition, Fannie Mae can
protect itself against losses from a lender’s nonperformance
by terminating a lender’s contractual status as a Fannie Mae
seller/servicer, selling these rights to service Fannie Mae
loans, and retaining sale proceeds. Lenders with recourse
obligations had servicing rights on $1.288 trillion
of mortgages.
The primary credit risk associated with the Liquid
Investment Portfolio is that issuers will not repay
Fannie Mae in accordance with contractual terms.
The level of credit risk in the portfolio is low because
these investments are primarily high-quality, short-term
investments, such as asset-backed securities, commercial
paper, and federal funds. The majority of asset-backed
securities in the Liquid Investment Portfolio are rated
AAA by Standard & Poor’s. Unsecured investments in
the portfolio are generally rated A or higher by
Standard & Poor’s. At December 31, 2001, 96 percent
of the Liquid Investment Portfolio had a credit rating
of A or higher.
The primary credit risk associated with mortgage servicers
is that they will not fulfill their contractual servicing
obligations. On behalf of Fannie Mae, mortgage servicers
collect mortgage and escrow payments from borrowers, pay
taxes and insurance costs from escrow accounts, monitor and
report delinquencies, and perform other required activities.
A servicing contract breach could result in credit losses for
Fannie Mae, or Fannie Mae could incur the cost of finding
a replacement servicer. Fannie Mae mitigates this risk by
requiring mortgage servicers to maintain a minimum
servicing fee rate that Fannie Mae can retain or transfer to
compensate a replacement servicer in the event of a servicing
contract breach. Fannie Mae also manages this risk by
requiring servicers to follow specific servicing guidelines and
by monitoring each servicer’s performance using loan-level
data. Fannie Mae conducts on-site reviews of compliance
with servicing guidelines and mortgage servicing
performance. Fannie Mae also works on-site with nearly all
of its major servicers to facilitate loan loss mitigation efforts
and improve the default management process. In addition,
Fannie Mae reviews quarterly financial information on
servicers. At year-end 2001, Fannie Mae’s ten largest
mortgage servicers serviced 71 percent of its single-family
book of business.
Information on derivative counterparty credit risk is
included in MD&A under “Balance Sheet—Derivative
Instruments.” Additional information on non-derivative
counterparty risk is presented in the Notes to Financial
Statements under Note 14, “Financial Instruments with
Off-Balance-Sheet Risk,” and Note 15, “Concentrations
of Credit Risk.”
Operations Risk Management
Fannie Mae actively manages its operations risk through various
measures, such as key performance indicators, to monitor and identify
trends.
Operations risk is the risk of potential loss resulting from a
breakdown in established controls and procedures, examples
of which include circumvention of internal controls, fraud,
human error, and systems malfunction or failure.
Fannie Mae has established extensive policies and
procedures to decrease the likelihood of such occurrences.
Fannie Mae’s Office of Auditing tests the adequacy of and
adherence to internal controls and established policies and
procedures. Financial system data are regularly reconciled to
source documents to ensure the accuracy of financial system
outputs. In addition, Fannie Mae has a comprehensive
disaster recovery plan that is designed to restore critical
operations with minimal interruption in the event of a
disaster. Although the attacks of September 11, 2001
temporarily reduced mortgage commitments and slowed
portfolio growth, Fannie Mae was able to remain open for
business during every day of the week of the tragedy with
only minimal disruption to operations.
The use of financial forecast models is another potential
operations risk. To mitigate the risk associated with the use
of financial models, Fannie Mae regularly reconciles
forecasted results to actual results and recalibrates models
for the differences.
Fannie Mae evaluates key performance indicators for
elements of operations risk to monitor trends and identify
early warning signals. Each key performance indicator is
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