Fannie Mae 2005 Annual Report Download - page 304

single-family and multifamily borrowers, mortgage insurers, mortgage servicers, derivative counterparties and
parties associated with our off-balance sheet transactions. Concentrations for each of these groups are
discussed below.
Single-Family Loan Borrowers. Regional economic conditions affect a borrower’s ability to repay his or her
mortgage loan and the property value underlying the loan. Geographic concentrations increase the exposure of
our portfolio to changes in credit risk. Single-family borrowers are primarily affected by home price
appreciation and low interest rates. The geographic dispersion of our Single-Family Credit Guaranty business
has been consistently diversified over the three years ended December 31, 2005, with our largest exposure in
the Western region of the United States, which represented 25% of our single-family conventional mortgage
credit book of business. No region or state experienced negative home price growth over this three-year period.
Except for California, where 17% and 18% of the gross unpaid principal balance of our conventional single-
family mortgage loans held or securitized in Fannie Mae MBS as of December 31, 2005 and 2004,
respectively, were located, no other significant concentrations existed in any state.
To manage credit risk and comply with legal requirements, we typically require primary mortgage insurance
or other credit enhancements if the current LTV ratio (i.e., the ratio of the unpaid principal balance of a loan
to the current value of the property that serves as collateral) of a single-family conventional mortgage loan is
greater than 80% when the loan is delivered to us. We may also require credit enhancements if the original
LTV ratio of a single-family conventional mortgage loan is less than 80% when the loan is delivered to us.
Multifamily Loan Borrowers. Numerous factors affect a multifamily borrower’s ability to repay his or her
loan and the property value underlying the loan. The most significant factor affecting credit risk is rental
vacancy rates for the mortgaged property. Vacancy rates vary among geographic regions of the United States.
The average mortgage values for multifamily loans are significantly larger than those for single-family
borrowers and therefore individual defaults for multifamily borrowers can be more significant to us. However,
these loans, while individually large, represent a small percentage of our total loan portfolio. Our multifamily
geographic concentrations have been consistently diversified over the three years ended December 31, 2005,
with our largest exposure in the Western region of the United States, which represented 35% of our
multifamily mortgage credit book of business. Except for California, where 29% and 28%, of the gross unpaid
principal balance of our multifamily mortgage loans held or securitized in Fannie Mae MBS as of
December 31, 2005 and 2004, respectively, were located, no other significant concentrations existed in any
state.
As part of our multifamily risk management activities, we perform detailed loss reviews that evaluate borrower
and geographic concentrations, lender qualifications, counterparty risk, property performance and contract
compliance. We generally require servicers to submit periodic property operating information and condition
reviews so that we may monitor the performance of individual loans. We use this information to evaluate the
credit quality of our portfolio, identify potential problem loans and initiate appropriate loss mitigation
activities.
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FANNIE MAE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)