Fannie Mae 2004 Annual Report Download - page 157

Losses from the Gulf Coast Hurricanes Katrina and Rita increased our provision for credit losses in 2005. Our
exposure to losses as a result of Hurricanes Katrina and Rita arose primarily from Fannie Mae MBS backed
by loans secured by properties in the affected areas, our portfolio holdings of mortgage loans and mortgage-
related securities backed by loans secured by properties in the affected areas, and real estate that we own in
the affected areas. We initially estimated that our after-tax losses associated with the Gulf Coast Hurricanes
would be in a range of $250 million to $550 million, which included both single-family and multifamily
properties. As a result of our ongoing assessment and loss mitigation activities, we reduced and refined our
estimated after-tax losses to a range of $97 million to $160 million. The reduction in our estimate is the result
of several factors, including the liquidation of a number of loans relating to flooded properties from our
mortgage portfolio, borrower receipts of more insurance and disaster relief funds than previously expected on
the flooded properties and reduced delinquencies for affected loans outside the flood-damaged areas. Our
ongoing analysis has resulted in a further reduction in our combined allowance for loan losses and reserve for
guaranty losses during the first nine months of 2006 to reflect our revised estimate. Further adjustments to this
estimate are possible as we continue to monitor this issue.
We use internally developed models to assess our sensitivity to credit losses based on current data on home
values, borrower payment patterns, non-mortgage consumer credit history and management’s economic
outlook. We closely examine a range of potential economic scenarios to monitor the sensitivity of credit
losses. Our models indicate that home price movements are an important predictor of credit performance.
Pursuant to the September 1, 2005 agreement with OFHEO, we agreed to provide quarterly assessments of the
impact on our expected credit losses from an immediate 5% decline in single-family home prices for the entire
United States, which we believe is a stressful scenario based on housing data from OFHEO. Historical
statistics from OFHEO’s house price index reports indicate the national average rate of home price
appreciation over the last 20 years has been about 5.3%, while the lowest national average annual appreciation
rate in any single year has been 0.3%. However, we believe there is a possibility of modest declines in home
prices in 2007.
We develop a baseline scenario that estimates the present value of future credit losses over a ten-year period.
We then calculate the present value of credit losses assuming an immediate 5% decline in the value of single-
family properties securing mortgage loans we own or that back Fannie Mae MBS. Following this decline, we
assume home prices will follow a statistically derived long-term path. The sensitivity of future credit losses
represents the dollar difference between credit losses in the baseline scenario and credit losses assuming the
immediate 5% home price decline. The estimated sensitivity of our expected future credit losses to an
immediate 5% decline in home values for single-family mortgage loans as of December 31, 2004 and 2003 is
disclosed in the following table. We disclose both the gross credit loss sensitivity prior to the receipt of private
mortgage insurance claims or any other credit enhancements and the net credit loss sensitivity after
consideration of these items.
Table 33: Single-Family Credit Loss Sensitivity
(1)
2004 2003
As of December 31,
(Restated)
(Dollars in millions)
Gross credit loss sensitivity
(2)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,266 $ 2,189
Less: Projected credit risk sharing proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,179 1,125
Net credit loss sensitivity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,087 $ 1,064
Single-family whole loans and Fannie Mae MBS . . . . . . . . . . . . . . . . . . . . . . . . . . $1,980,789 $1,940,849
Single-family net credit loss sensitivity as a percentage of single-family whole loans
and Fannie Mae MBS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.05% 0.05%
(1)
Represents total economic credit losses, which include net charge-offs/recoveries, foreclosed property expenses, forgone
interest and the cost of carrying foreclosed properties.
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