Fannie Mae 2005 Annual Report Download - page 25

participants in the secondary mortgage market that we believe also share our general investment objective of
seeking to maximize the returns they receive through the purchase and sale of mortgage assets. In addition, in
recent years, several large mortgage lenders have increased their retained holdings of the mortgage loans they
originate. Competition for mortgage-related assets among investors in the secondary market was intense in
2004, 2005 and 2006. The spreads between the yield on our debt securities and expected yields on mortgage
assets, after consideration of the net risks associated with the investments, were very narrow in 2004, 2005 and
2006, reflecting strong investor demand from banks, funds and other investors. This high demand for mortgage
assets increased the price of mortgage assets relative to the credit risks associated with these assets.
We have been the largest agency issuer of mortgage-related securities in every year since 1990. Competition
for the issuance of mortgage-related securities is intense and participants compete on the basis of the value of
their products and services relative to the prices they charge. Value can be delivered through the liquidity and
trading levels for an issuer’s securities, the range of products and services offered, and the reliability and
consistency with which it conducts its business. In recent years, there has been a significant increase in the
issuance of mortgage-related securities by non-agency issuers. Non-agency issuers, also referred to as private-
label issuers, are those issuers of mortgage-related securities other than agency issuers Fannie Mae, Freddie
Mac or Ginnie Mae. Private-label issuers have significantly increased their share of the mortgage-related
securities market and accounted for more than half of new single-family mortgage-related securities issuances
in 2006. As the market share for private-label securities has increased, our market share has decreased. During
2006, our estimated market share of new single-family mortgage-related securities issuance was 23.7%,
compared to 23.5% in 2005, 29.2% in 2004 and 45.0% in 2003. Our estimates of market share are based on
publicly available data and exclude previously securitized mortgages. We expect our Single-Family business to
continue to face significant competition from private-label issuers.
We also expect private-label issuers to provide increased competition to our HCD business. The commercial
mortgage-backed securities (“CMBS”) issued by private-label issuers are typically backed not only by loans
secured by multifamily residential property, but also by loans secured by a mix of retail, office, hotel and
other commercial properties. We are restricted by our charter to issuing Fannie Mae MBS backed by
residential loans, which often have lower yields than other types of commercial real estate loans. Private-label
issuers include multifamily residential loans in pools backing CMBS because those properties, while generally
generating lower cash flow than other types of commercial properties, generally have lower default rates,
which improves the overall performance of CMBS pools. To obtain multifamily residential property loans for
CMBS pools, private-label issuers are sometimes willing to purchase loans of a lesser credit quality than the
loans we purchase and to price their purchases of these loans more aggressively than we typically price our
purchases. Because we usually guarantee our Fannie Mae MBS, we generally maintain high credit standards to
limit our exposure to defaults. Private-label issuers often structure their CMBS transactions so that certain
classes of the securities issued in each transaction bear most of the default risk on the loans underlying the
transaction. These securities are placed with investors that are prepared to assume that risk in exchange for
higher yields.
OUR CHARTER AND REGULATION OF OUR ACTIVITIES
We are a stockholder-owned corporation organized and existing under the Federal National Mortgage
Association Charter Act, which we refer to as the Charter Act or our charter. We were established in 1938
pursuant to the National Housing Act and originally operated as a U.S. government entity. Title III of the
National Housing Act amended our charter in 1954, and we became a mixed-ownership corporation, with our
preferred stock owned by the federal government and our non-voting common stock held by private investors.
In 1968, our charter was further amended and our predecessor entity was divided into the present Fannie Mae
and Ginnie Mae. Ginnie Mae remained a government entity, but all of the preferred stock of Fannie Mae that
had been held by the U.S. government was retired, and Fannie Mae became privately owned.
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