Fannie Mae 2004 Annual Report Download - page 10

residential mortgage debt outstanding averaged 10.6% per year over that period, which is faster than the 6.9%
average growth in the U.S. economy over the same period, as measured by nominal gross domestic product.
Growth in U.S. residential mortgage debt outstanding was particularly strong during 2001 through 2005. Total
U.S. residential mortgage debt outstanding grew at an estimated annual rate of almost 13% in 2002 and 2003,
approximately 15% in 2004 and approximately 14% in 2005.
Homeownership rates, home price appreciation and certain macroeconomic factors such as interest rates are
large drivers of growth in U.S. residential mortgage debt outstanding. Growth in U.S. residential mortgage
debt outstanding in recent years has been driven primarily by record home sales, strong home price
appreciation and historically low interest rates. Also contributing to growth in U.S. residential mortgage debt
outstanding in recent years was the increased use of mortgage debt financing by homeowners and demographic
trends that contributed to increased household formation and higher homeownership rates. Growth in
U.S. residential mortgage debt outstanding has moderated in 2006 in response to slower home price growth, a
sharp drop-off in home sales and declining refinance activity. While total U.S. residential mortgage debt
outstanding as of June 30, 2006 was 12.3% higher than year-ago levels, the annualized growth rate in the
second quarter of 2006 slowed to 9.6%. We expect that growth in total U.S. residential mortgage debt
outstanding will continue at a slower pace in 2007, as the housing market continues to cool and home price
gains moderate further or possibly decline modestly. We believe that the continuation of positive demographic
trends, such as stable household formation rates, will help mitigate this slowdown in the growth in residential
mortgage debt outstanding, but these trends are unlikely to completely offset the slowdown in the short- to
medium-term.
Over the past 30 years, home values (as measured by the OFHEO House Price Index) and income (as
measured by per capita personal income) have both risen at around a 6% annualized rate. During 2001 through
2005, however, this comparability between home values and income eroded, with income growth averaging
approximately 4.1% and home price appreciation averaging over 9%. Moreover, home price appreciation was
especially rapid in 2004 and 2005, with rates of home price appreciation of approximately 11% in 2004 and
13% in 2005 on a national basis (with some regional variations). This period of extraordinary home price
appreciation appears to be ending. According to the OFHEO House Price Index, home prices increased at a
3.45% annualized rate in the third quarter of 2006, which was the slowest pace of home price appreciation
since 1998. We believe a modest decline in national home prices in 2007 is possible.
The amount of residential mortgage debt available for us to purchase or securitize and the mix of available
loan products are affected by several factors, including the volume of single-family mortgages within the loan
limits imposed under our charter, consumer preferences for different types of mortgages, and the purchase and
securitization activity of other financial institutions. See “Item 1A—Risk Factors” for a description of the risks
associated with the recent slowdown in home price appreciation, as well as competitive factors affecting our
business.
Our Role in the Secondary Mortgage Market
The mortgage market comprises a major portion of the domestic capital markets and provides a vital source of
financing for the large housing segment of the economy, as well as one of the most important means for
Americans to achieve their homeownership objectives. The U.S. Congress chartered Fannie Mae and certain
other GSEs to help ensure stability and liquidity within the secondary mortgage market. Our activities are
especially valuable when economic or financial market conditions constrain the flow of funds for mortgage
lending. In addition, we believe our activities and those of other GSEs help lower the costs of borrowing in
the mortgage market, which makes housing more affordable and increases homeownership, especially for low-
to moderate-income families. We believe our activities also increase the supply of affordable rental housing.
Our principal customers are lenders that operate within the primary mortgage market by originating mortgage
loans for homebuyers and current homeowners refinancing their existing mortgage loans. Our customers
include mortgage banking companies, savings and loan associations, savings banks, commercial banks, credit
unions, community banks, and state and local housing finance agencies. Lenders originating mortgages in the
primary market often sell them in the secondary mortgage market in the form of loans or in the form of
mortgage-related securities.
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