Fannie Mae 2002 Annual Report Download - page 83

81
FANNIE MAE 2002 ANNUAL REPORT
to secure single-family lender recourse transactions. In
addition, single-family lenders with recourse obligations
received servicing fees on $1.452 trillion and $1.288 trillion
of mortgages at year-end 2002 and 2001, respectively. A
portion of these servicing fees effectively serves as collateral.
We had recourse to lenders on multifamily loans totaling
$77 billion and $63 billion at December 31, 2002 and 2001,
respectively. Our multifamily recourse obligations were
secured by reserves held in custodial accounts, insurance
policies, letters of credit from investment-grade
counterparties rated A or better, and investment agreements.
In addition, all multifamily lenders with recourse obligations
received servicing fees, a portion of which effectively serves
as collateral.
Mortgage Servicers
The primary risk associated with mortgage servicers is that
they will fail to fulfill their servicing obligations. 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 on our behalf. A servicing contract
breach could result in credit losses for us, or we could incur
the cost of finding a replacement servicer, which could be
substantial for loans that require a specialized servicer. We
mitigate this risk by requiring mortgage servicers to maintain
a minimum reserve servicing fee rate to compensate a
replacement servicer in the event of a servicing contract
breach. We also manage this risk by requiring servicers to
follow specific servicing guidelines and by monitoring each
servicer’s performance using loan-level data. We conduct
on-site reviews of compliance with servicing guidelines and
mortgage servicing performance. We also work on-site with
nearly all of our major servicers to facilitate loan loss
mitigation efforts and improve the default management
process. In addition, we review quarterly financial
information on servicers. Our ten largest single-family
mortgage servicers serviced 63 percent of our single-family
book of business at the end of 2002 and 2001. Fannie Mae’s
15 largest multifamily mortgage servicers serviced 70 percent
of our multifamily book of business at year-end 2002,
compared with 67 percent at year-end 2001.
We have purchased mortgage-related securities secured by
manufactured housing that were issued by entities other than
Fannie Mae both for our portfolio and, to a limited extent,
for securitization into REMIC securities we have issued and
guaranteed. We currently own or guarantee approximately
$10 billion of these securities. Due to weakness in the
manufactured housing sector and the financial condition
of Conseco Finance Corp., which services approximately
70 percent of these securities, the major securities rating
agencies downgraded several of the securities. As of
December 31, 2002, the vast majority of these securities were
rated AA- or better, and the entire $10 billion of securities
either had investment-grade ratings or were insured by
counterparties which had investment-grade ratings.
Management believes that any potential impairment that
might be recorded in the future will not be material to
Fannie Mae’s operating results.
On March 14, 2003, the U.S. Bankruptcy Court for the
Northern District of Illinois issued a final order approving
the servicing arrangements for the securities serviced
by Conseco Finance Corp. The order, based upon an
agreement reached between Conseco Finance, CFN
Investment Holdings (the new owner and servicer),
Fannie Mae and other certificate holders, provided for
revised servicing fees and an enhanced servicing protocol.
CFN is expected to complete the acquisition in the second
quarter of 2003.
Mortgage Insurers
The primary risk associated with mortgage insurers is that
they will fail to fulfill their obligations to reimburse us for
claims under insurance policies. We were the beneficiary
of primary mortgage insurance coverage on $316 billion
of single-family loans in portfolio or underlying MBS at
December 31, 2002 and $314 billion at December 31, 2001.
Seven mortgage insurance companies, all rated AA or higher
by S&P, provided approximately 99 percent of the total
coverage at the end of 2002 and 2001.
Liquid Investments
The primary credit risk associated with our liquid
investments, which includes the LIP, our early funding
portfolio, and cash and cash equivalents, is that issuers will
not repay us in accordance with contractual terms. The level
of credit risk in our liquid investments is low because these
investments are primarily high-quality, short- and medium-
term investments. These investments include our early
funding portfolio, which consists primarily of repurchase
agreements, and other high-quality, short-term investments
in nonmortgage assets, such as federal funds and time
deposits, commercial paper, asset-backed securities,
and corporate floating-rate notes. The majority of our
nonmortgage asset-backed securities are rated AAA by S&P.
Unsecured investments in the portfolio are generally rated A
or higher by S&P. Our LIP, which accounts for the majority
of our liquid investments, totaled $39 billion and $65 billion
at the end of 2002 and 2001, respectively. Approximately
94 percent of our LIP had a credit rating of A or higher
at December 31, 2002, compared with 96 percent at
December 31, 2001.