Fannie Mae 2004 Annual Report Download - page 140

Risk Officer will report to the Board of Directors annually on management’s adherence to these risk
principles.
Credit Risk Management
We assess, price and assume mortgage credit risk as a basic component of our business. We assume
institutional counterparty credit risk in a variety of our business transactions, including transactions designed
to mitigate mortgage credit risk and interest rate risk. The degree of credit risk to which we are exposed will
vary based on many factors, including the risk profile of the borrower or counterparty, the contractual terms of
the agreement, the amount of the transaction, repayment sources, the availability and quality of collateral and
other factors relevant to current events, conditions and expectations. We evaluate these factors and actively
manage, on an aggregate basis, the extent and nature of the credit risk we bear, with the objective of ensuring
that we are adequately compensated for the credit risk we take, consistent with our mission goals.
Our Single-Family Credit Guaranty and HCD businesses are responsible for identifying, measuring, monitoring
and managing credit risk subject to corporate risk policies and limits approved by the Chief Risk Office, which
provides corporate oversight of the credit risk management process. The Corporate Risk Management
Committee, which focuses on credit and market risk, meets at least monthly to review our aggregate credit
risk profile and monitor our exposure relative to risk limits.
Our credit-related losses during the period 2002 to 2004 reflect the high credit quality of our mortgage credit
book of business, resulting from the effect of a combination of several factors, including strong home price
appreciation during the period, the benefits we receive from credit enhancements and other risk-sharing
strategies, and our loss mitigation efforts. Our credit-related losses during this period remained at what we
consider to be low levels, averaging approximately 0.01% of our mortgage credit book of business.
Mortgage Credit Risk Management
Mortgage credit risk is the risk that a borrower will fail to make required mortgage payments. We are exposed
to credit risk on our mortgage credit book of business because we either hold the mortgage assets or have
issued a guaranty in connection with the creation of Fannie Mae MBS backed by mortgage assets. Our
mortgage credit book of business consists of both on- and off-balance sheet arrangements, including single-
family and multifamily mortgage loans held in our portfolio; Fannie Mae MBS and non-Fannie Mae
mortgage-related securities held in our portfolio; Fannie Mae MBS held by third-party investors; and credit
enhancements that we provide on mortgage assets. We provide additional information regarding our off-
balance sheet arrangements in “Off-Balance Sheet Arrangements” below.
Factors affecting credit risk on loans in our single-family mortgage credit book of business include the
borrower’s financial strength and credit profile; the type of mortgage; the characteristics of the property
securing the mortgage; and economic conditions, such as changes in home prices. Factors that affect credit
risk on a multifamily loan include the structure of the financing; the type and location of the property; the
condition and value of the property; the financial strength of the borrower and lender; market and sub-market
trends and growth; and the current and anticipated cash flows from the property. These and other factors affect
both the amount of expected credit loss on a given loan and the sensitivity of that loss to changes in the
economic environment.
Table 26 displays the composition of our mortgage credit book of business as of December 31, 2004, 2003
and 2002. As indicated in Table 26, our single-family mortgage credit book of business accounted for
approximately 95% of our entire mortgage credit book of business as of December 31, 2004, 2003 and 2002.
135