Fannie Mae 2005 Annual Report Download - page 46

and Fitch Ratings (“Fitch”). These ratings are subject to revision or withdrawal at any time by the rating
agencies. Any reduction in our credit ratings could increase our borrowing costs, limit our access to the capital
markets and trigger additional collateral requirements in derivative contracts and other borrowing arrange-
ments. A substantial reduction in our credit ratings would reduce our earnings and materially adversely affect
our liquidity, our ability to conduct our normal business operations and our competitive position. A description
of our credit ratings and current ratings outlook is included in “Item 7—MD&A—Liquidity and Capital
Management—Liquidity—Credit Ratings and Risk Ratings.”
We depend on our institutional counterparties to provide services that are critical to our business, and our
financial condition and results of operations may be adversely affected by defaults by our institutional
counterparties.
We face the risk that our institutional counterparties may fail to fulfill their contractual obligations to us. Our
primary exposure to institutional counterparty risk is with our mortgage insurers, mortgage servicers,
depository institutions, lender customers, dealers that commit to sell mortgage pools or loans to us, issuers of
investments held in our liquid investment portfolio, and derivatives counterparties. The products or services
that these counterparties provide are critical to our business operations and a default by a counterparty with
significant obligations to us could adversely affect our financial condition and results of operations. A
discussion of how we manage institutional counterparty credit risk is included in “Item 7—MD&A—Risk
Management—Credit Risk Management—Institutional Counterparty Credit Risk Management.”
Mortgage Insurers. Mortgage insurers may provide primary mortgage insurance or pool mortgage insurance.
Primary mortgage insurance is insurance on an individual loan, while pool mortgage insurance is insurance
that applies to a defined group of loans. A mortgage insurer could fail to fulfill its obligation to reimburse us
for claims under our mortgage insurance policies, which would require us to bear the full loss of the borrower
default on the mortgage loans. As of December 31, 2005, we were the beneficiary of primary mortgage
insurance coverage on $263.1 billion, and the beneficiary of pool mortgage insurance coverage on $71.7 billion,
of single-family loans, including conventional and government loans, held in our portfolio or underlying
Fannie Mae MBS, which represented approximately 13% and 4%, respectively, of our single-family mortgage
credit book of business.
Mortgage Servicers. One or more of our mortgage servicers could fail to fulfill its mortgage loan servicing
obligations, which include collecting payments from borrowers under the mortgage loans that we own or that
back our Fannie Mae MBS, paying taxes and insurance on the properties secured by the mortgage loans,
monitoring and reporting loan delinquencies, and repurchasing any loans that are subsequently found to have
not met our underwriting criteria. In that event, we could incur credit losses associated with loan delinquencies
or penalties for late payment of taxes and insurance on the properties that secure the mortgage loans serviced
by that mortgage servicer. In addition, we likely would be forced to incur the costs necessary to replace the
defaulting mortgage servicer. These events would result in a decrease in our net income. As of December 31,
2005, our ten largest single-family mortgage servicers serviced 72% of our single-family mortgage credit book
of business, and Countrywide Financial Corporation, which is our largest single-family mortgage servicer,
serviced 22% of the single-family mortgage credit book of business. Accordingly, the effect of a default by
any one of these servicers could result in a more significant decrease in our net income than if our loans were
serviced by a more diverse group of servicers.
Lender Risk-Sharing Agreements. We enter into risk-sharing agreements with some of our lender customers
that require them to reimburse us for losses under the loans that are the subject of those agreements. A
lender’s default in its obligation to reimburse us could decrease our net income.
Custodial Depository Institutions. In connection with our mortgage servicers’ obligations to collect funds
from borrowers and make payments to us relating to the properties securing the mortgage loans, the servicers
deposit borrower payments in a depository institution that the servicer selects. In the event that one or more of
these depository institutions becomes insolvent, or if the funds it holds become subject to claims of the
institution’s creditors, both we and the servicer may be unable to access the funds held by the depository
institution. In that event, we would be unable to make required payments to holders of Fannie Mae MBS using
the funds that are owed to us but in the possession of the depository institution and instead would be required
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