Fannie Mae 2004 Annual Report Download - page 53

The occurrence of a major natural or other disaster in the United States could increase our delinquency
rates and credit losses or disrupt our business operations and lead to financial losses.
The occurrence of a major natural disaster, terrorist attack or health epidemic in the United States could
increase our delinquency rates and credit losses in the affected region or regions, which could have a material
adverse effect on our financial condition and results of operations. For example, we experienced an increase in
our delinquency rates and credit losses as a result of Hurricanes Katrina and Rita. In addition, as of
December 31, 2004, approximately 18% of the gross unpaid principal balance of the conventional single-
family loans we held or securitized in Fannie Mae MBS and approximately 28% of the gross unpaid principal
balance of the multifamily loans we held or securitized in Fannie Mae MBS were concentrated in California.
Due to this geographic concentration in California, a major earthquake or other disaster in that state could lead
to significant increases in delinquency rates and credit losses.
Despite the contingency plans and facilities that we have in place, our ability to conduct business also may be
adversely affected by a disruption in the infrastructure that supports our business and the communities in
which we are located. Potential disruptions may include those involving electrical, communications,
transportation and other services we use or that are provided to us. Substantially all of our senior management
and investment personnel work out of our offices in the Washington, DC metropolitan area. If a disruption
occurs and our senior management or other employees are unable to occupy our offices, communicate with
other personnel or travel to other locations, our ability to service and interact with each other and with our
customers may suffer, and we may not be successful in implementing contingency plans that depend on
communication or travel. A description of our disaster recovery plans and facilities in the event of a disruption
of this type is included in “Item 7—MD&A—Risk Management—Operational Risk Management.”
In many cases, our accounting policies and methods, which are fundamental to how we report our financial
condition and results of operations, require management to make estimates and rely on the use of models
about matters that are inherently uncertain.
Our accounting policies and methods are fundamental to how we record and report our financial condition and
results of operations. Our management must exercise judgment in applying many of these accounting policies
and methods so that these policies and methods comply with GAAP and reflect management’s judgment of the
most appropriate manner to report our financial condition and results of operations. In some cases,
management must select the appropriate accounting policy or method from two or more alternatives, any of
which might be reasonable under the circumstances but might affect the amount of assets, liabilities, revenues
and expenses that we report. See “Notes to Consolidated Financial Statements—Note 2, Summary of
Significant Accounting Policies” for a description of our significant accounting policies.
We have identified the following four accounting policies as critical to the presentation of our financial
condition and results of operations:
• estimating the fair value of financial instruments;
• amortizing cost basis adjustments on mortgage loans and mortgage-related securities held in our portfolio
and underlying outstanding Fannie Mae MBS using the effective interest method;
• determining our allowance for loan losses and reserve for guaranty losses; and
• determining whether an entity in which we have an ownership interest is a variable interest entity and
whether we are the primary beneficiary of that variable interest entity and therefore must consolidate the
entity.
We believe these policies are critical because they require management to make particularly subjective or
complex judgments about matters that are inherently uncertain and because of the likelihood that materially
different amounts would be reported under different conditions or using different assumptions. Due to the
complexity of these critical accounting policies, our accounting methods relating to these policies involve
substantial use of models. Models are inherently imperfect predictors of actual results because they are based on
assumptions, including assumptions about future events, and actual results could differ significantly. More
information about these policies is included in “Item 7—MD&A—Critical Accounting Policies and Estimates.”
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