Fannie Mae 2004 Annual Report Download - page 52

mortgage loans serving low- and moderate-income households, households in underserved areas and house-
holds qualifying under the definition of special affordable housing. HUD has increased our housing goals for
2005 through 2008, and has created new purchase money mortgage subgoals effective beginning in 2005 that
also increase over the 2005 to 2008 period.
Meeting the increased housing goals and subgoals established by HUD for 2006 and future years may reduce
our profitability and compete with our goal of maximizing total returns. In order to obtain business that
contributes to our new housing goals and subgoals, we have made, and continue to make, significant
adjustments to our mortgage loan sourcing and purchase strategies. These strategies include entering into some
purchase and securitization transactions with lower expected economic returns than our typical transactions.
We have also relaxed some of our underwriting criteria to obtain goals-qualifying mortgage loans and
increased our investments in higher-risk mortgage loan products that are more likely to serve the borrowers
targeted by HUD’s goals and subgoals, which could increase our credit losses.
The specific housing goals and subgoals levels for 2005 through 2008, as well as our performance against
these goals in 2005, are described in “Item 1—Business—Our Charter and Regulation of Our Activities—
Regulation and Oversight of Our Activities—HUD Regulation—Housing Goals.” We did not meet one of our
2005 subgoals, and it is possible that we may not meet one or more of our 2006 subgoals. Meeting the higher
subgoals for 2006 is particularly challenging because increased home prices and higher interest rates have
reduced housing affordability. Since HUD set the home purchase subgoals in 2004, the affordable housing
markets have experienced a dramatic change. Newly-released Home Mortgage Disclosure Act data show that
the share of the primary mortgage market serving low- and moderate-income borrowers declined in 2005,
reducing our ability to purchase and securitize mortgage loans that meet the HUD subgoals. If our efforts to
meet the new housing goals and subgoals in 2006 and future years prove to be insufficient, we may need to
take additional steps that could increase our credit losses and reduce our profitability.
Our business faces significant operational risks and an operational failure could materially adversely affect
our business.
Shortcomings or failures in our internal processes, people or systems could have a material adverse effect on
our risk management, liquidity, financial condition and results of operations; disrupt our business; and result in
legislative or regulatory intervention, damage to our reputation and liability to customers. For example, our
business is dependent on our ability to manage and process, on a daily basis, a large number of transactions
across numerous and diverse markets. These transactions are subject to various legal and regulatory standards.
We rely on the ability of our employees and our internal financial, accounting, data processing and other
operating systems, as well as technological systems operated by third parties, to process these transactions and
to manage our business. As a result of events that are wholly or partially beyond our control, these employees
or third parties could engage in improper or unauthorized actions, or these systems could fail to operate
properly. In the event of a breakdown in the operation of our or a third party’s systems, or improper actions by
employees or third parties, we could experience financial losses, business disruptions, legal and regulatory
sanctions, and reputational damage.
Because we use a process of delegated underwriting for the single-family mortgage loans we purchase and
securitize, we do not independently verify most borrower information that is provided to us. This exposes us
to mortgage fraud risk, which is the risk that one or more parties involved in a transaction (the borrower,
seller, broker, appraiser, title agent, lender or servicer) will misrepresent the facts about a mortgage loan. We
may experience financial losses and reputational damage as a result of mortgage fraud.
In addition, our operations rely on the secure processing, storage and transmission of a large volume of private
borrower information, such as names, residential addresses, social security numbers, credit rating data and other
consumer financial information. Despite the protective measures we take to reduce the likelihood of information
breaches, this information could be exposed in several ways, including through unauthorized access to our
computer systems, computer viruses that attack our computer systems, software or networks, accidental delivery
of information to an unauthorized party and loss of unencrypted media containing this information. Any of these
events could result in significant financial losses, legal and regulatory sanctions, and reputational damage.
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