Fannie Mae 2004 Annual Report Download - page 343

Mortgage Insurers. The primary credit 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 $285.4 billion and $308.8 billion of single-family loans held or securitized in
Fannie Mae MBS as of December 31, 2004 and 2003, respectively. Seven mortgage insurance companies, all
rated AA (or its equivalent) or higher by Standard & Poor’s, Moody’s or Fitch, provided approximately 99%
of the total coverage as of December 31, 2004 and 2003.
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, and we could incur the
cost of finding a replacement servicer, which could be substantial for loans that require a special servicer. Our
ten largest single-family mortgage servicers serviced 71% and 69% of our single-family mortgage credit book
of business as of December 31, 2004 and 2003, respectively. Our ten largest multifamily mortgage servicers
serviced 67% of our multifamily mortgage credit book of business as of both December 31, 2004 and 2003.
Derivative Counterparties. The primary credit exposure we have on a derivative transaction is that a
counterparty might default on payments due. Additionally, we may need to replace the derivative counterparty
with a different counterparty at a higher cost.
We typically manage credit risk by contracting with experienced counterparties that are rated A (or its
equivalent) or better, spreading the credit risk among many counterparties and placing contractual limits on the
amount of unsecured credit extended to any single counterparty. We enter into master netting arrangements
that provide for netting of amounts due to us and amounts due to counterparties under those agreements,
which reduces our exposure to a single counterparty in the event of default.
Additionally, we require collateral in specified instances to limit our counterparty credit risk exposure. We
have a collateral management policy with provisions for requiring collateral on interest rate and foreign
currency derivative contracts in net gain positions based upon the counterparty’s credit rating. The collateral
includes cash, U.S. Treasury securities, agency debt and agency mortgage-related securities. A third-party
custodian holds for us all of the collateral posted to us and monitors the value on a daily basis. We monitor
credit exposure on our derivatives daily by valuing them using internal pricing models and dealer quotes and
make collateral calls daily, as necessary. The table below displays the credit exposure on outstanding risk
management derivatives by counterparty credit ratings and notional amount by counterparty as of December 31,
2004 and 2003.
AAA AA A Subtotal Other
(2)
Total
Credit Rating
(1)
As of December 31, 2004
(Dollars in millions)
Credit loss exposure
(3)
. . . . . . . . . . . . . . . . . . . . . . $ 57 $ 3,200 $ 3,182 $ 6,439 $ 88 $ 6,527
Collateral held
(4)
. . . . . . . . . . . . . . . . . . . . . . . . . . — 2,984 3,001 5,985 — 5,985
Exposure net of collateral . . . . . . . . . . . . . . . . . . . . $ 57 $ 216 $ 181 $ 454 $ 88 $ 542
Additional information:
Notional amount . . . . . . . . . . . . . . . . . . . . . . . . . . $842 $327,895 $360,625 $689,362 $732 $690,094
Number of counterparties . . . . . . . . . . . . . . . . . . . . 3 12 8 23
F-92
FANNIE MAE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)