Fannie Mae 2004 Annual Report Download - page 20

to us in exchange for our Fannie Mae MBS, which thereafter may be held by the lenders or sold in the capital
markets. We guarantee to each MBS trust that we will supplement mortgage loan collections as required to
permit timely payment of principal and interest due on the related multifamily Fannie Mae MBS. In return for
our guaranty, we are paid a guaranty fee out of a portion of the interest on the loans underlying the
multifamily Fannie Mae MBS. For a description of a typical lender swap transaction by which we create
Fannie Mae MBS, see “Single-Family Credit Guaranty—Guaranty Services” above.
As with our Single-Family business, our Multifamily Group offers different types of Fannie Mae MBS as a
service to our lenders and as a response to specific investor preferences. The most commonly issued
multifamily Fannie Mae MBS are described below:
•Multifamily Single-Class Fannie Mae MBS represent beneficial interests in multifamily mortgage loans
held in an MBS trust and that were delivered to us by a lender in exchange for the single-class Fannie
Mae MBS. The certificate holders in a single-class Fannie Mae MBS issue receive principal and interest
payments in proportion to their percentage ownership of the MBS issue.
•Discount Fannie Mae MBS are short-term securities that generally have maturities between three and nine
months and are backed by one or more participation certificates representing interests in multifamily
loans. Investors earn a return on their investment in these securities by purchasing them at a discount to
their principal amounts and receiving the full principal amount when the securities reach maturity.
Discount MBS have no prepayment risk since prepayments are not allowed prior to maturity.
•Multifamily Whole Loan Multi-Class Fannie Mae MBS are multi-class Fannie Mae MBS that are formed
from multifamily whole loans, Federal Housing Administration (“FHA”) participation certificates and/or
Government National Mortgage Association (“Ginnie Mae”) participation certificates. Our HCD business
works with our Capital Markets group in structuring these multifamily whole loan multi-class Fannie Mae
MBS. Multifamily whole loan multi-class Fannie Mae MBS divide the cash flows on the underlying loans
or participation certificates and create several classes of securities, each of which represents a beneficial
ownership interest in a separate portion of the cash flows.
The fee and guaranty arrangements between HCD and Capital Markets are similar to the arrangements
between Single-Family and Capital Markets. Our HCD business bears the credit risk of borrowers defaulting
on their payments of principal and interest on the multifamily mortgage loans that back our guaranteed Fannie
Mae MBS, including Fannie Mae MBS held in our mortgage portfolio. In addition, HCD bears the credit risk
associated with the multifamily whole mortgage loans held in our mortgage portfolio. The HCD business
receives a guaranty fee in return for bearing the credit risk on guaranteed multifamily Fannie Mae MBS,
including Fannie Mae MBS held in our mortgage portfolio. In return for bearing credit risk on the multifamily
whole mortgage loans held in our mortgage portfolio, our HCD business is allocated fees from the Capital
Markets group comparable to the guaranty fees that it receives on guaranteed Fannie Mae MBS. As a result, in
our segment reporting, the expenses of the Capital Markets group include the transfer cost of the guaranty fees
and related fees allocated to our HCD segment, and the revenues of the HCD segment include the guaranty
fees and related fees received from the Capital Markets group.
HCD’s Multifamily Group manages credit risk in a manner similar to that of Single-Family by managing the
quality of the mortgages we acquire for our portfolio or securitize into Fannie Mae MBS, diversifying our
exposure to credit losses, continually assessing the level of credit risk that we bear, and actively managing
problem loans and assets to mitigate credit losses. Additionally, multifamily loans sold to us are often subject
to lender risk-sharing or other lender recourse arrangements. As of December 31, 2004, credit enhancements
existed on approximately 95% of the multifamily mortgage loans that we owned or that backed our Fannie
Mae MBS. As described above, in our DUS program, lenders typically bear a portion of the losses incurred on
an individual DUS loan. From time to time, we acquire multifamily loans pursuant to transactions in which
the lenders do not bear any risk on the loan and we therefore bear all of the risk. In such cases, we are
compensated accordingly for bearing all of the credit risk on the loan. For a description of our management of
multifamily credit risk, see “Item 7—MD&A—Risk Management—Credit Risk Management.” Refer to
“Item 1A—Risk Factors” for a description of the risks associated with our management of credit risk.
15