Fannie Mae 2005 Annual Report Download - page 15

A TBA trade represents a forward contract for the purchase or sale of single-family mortgage-related securities
to be delivered on a specified future date. In a typical TBA trade, the specific pool of mortgages that will be
delivered to fulfill the forward contract are unknown at the time of the trade. Parties to a TBA trade agree
upon the issuer, coupon, price, product type, amount of securities and settlement date for delivery. Settlement
for TBA trades is standardized to occur on one specific day each month. The mortgage-related securities that
ultimately will be delivered, and the loans backing those mortgage-related securities, frequently have not been
created or originated at the time of the TBA trade, even though a price for the securities is agreed to at that
time. Some trades are stipulated trades, in which the buyer and seller agree on specific characteristics of the
mortgage loans underlying the mortgage-related securities to be delivered (such as loan age, loan size or
geographic area of the loan). Some other transactions are specified trades, in which the buyer and seller
identify the actual mortgage pool to be traded (specifying the pool or CUSIP number). These specified trades
typically involve existing, seasoned TBA-eligible securities issued in the market. TBA sales enable originating
mortgage lenders to hedge their interest rate risk and efficiently lock in interest rates for mortgage loan
applicants throughout the loan origination process. The TBA market lowers transaction costs, increases
liquidity and facilitates efficient settlement of sales and purchases of mortgage-related securities.
Credit Risk Management
Our Single-Family business bears the credit risk of borrowers defaulting on their payments of principal and
interest on the single-family mortgage loans that back our guaranteed Fannie Mae MBS, including Fannie Mae
MBS held in our mortgage portfolio. In return, the Single-Family business receives a guaranty fee for bearing
this credit risk. In addition, Single-Family bears the credit risk associated with the single-family mortgage
loans held in our mortgage portfolio. In return for bearing this credit risk, Single-Family is allocated fees from
the Capital Markets group comparable to the guaranty fees that Single-Family 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 Single-Family, and the revenues of Single-
Family include the guaranty fees and related fees received from the Capital Markets group.
The credit risk associated with a single-family mortgage loan is largely determined by the creditworthiness of
the borrower, the nature and terms of the loan, the type of property securing the loan, the ratio of the unpaid
principal amount of the loan to the value of the property that serves as collateral for the loan (the
“loan-to-value ratio” or “LTV ratio”) and general economic conditions, including employment levels and the
rate of increases or decreases in home prices. We actively manage, on an aggregate basis, the extent and
nature of the credit risk we bear, with the objective of ensuring that we are adequately compensated for the
credit risk we take, consistent with our mission goals. One important part of our management strategy is the
use of credit enhancements, including primary mortgage insurance. For a description of our methods for
managing mortgage credit risk and a description of the credit characteristics of our single-family mortgage
credit book of business, refer to “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.
Our Single-Family business is also responsible for managing the credit risk to our business posed by defaults
by most of our institutional counterparties, such as our mortgage insurance providers and mortgage lenders
and servicers. See “Item 7—MD&A—Risk Management—Credit Risk Management” for a description of our
methods for managing institutional counterparty credit risk and “Item 1A—Risk Factors” for a description of
the risks associated with our management of credit risk.
Housing and Community Development
Our Housing and Community Development business engages in a range of activities primarily related to
increasing the supply of affordable rental and for-sale housing, as well as increasing liquidity in the debt and
equity markets related to such housing. In 2006, approximately 95% of the units financed by the multifamily
mortgage loans we purchased or securitized contributed to the achievement of the housing goals established by
HUD. See “Our Charter and Regulation of Our Activities—Regulation and Oversight of Our Activities—HUD
Regulation—Housing Goals” for a description of our housing goals.
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