Fannie Mae 2005 Annual Report Download - page 52

entitled to reimbursement for the costs and expenses of these lawsuits pursuant to our indemnification
obligations with those persons. We are also a party to several other lawsuits that, if decided against us, could
require us to pay substantial judgments, settlements or other penalties. These include a proposed class action
lawsuit alleging violations of federal and state antitrust laws and state consumer protection laws in connection
with the setting of our guaranty fees and a proposed class action lawsuit alleging that we violated purported
fiduciary duties with respect to certain escrow accounts for FHA-insured multifamily mortgage loans. We are
unable at this time to estimate our potential liability in these matters. We expect all of these lawsuits to be
time-consuming, and they may divert management’s attention and resources from our ordinary business
operations. More information regarding these lawsuits is included in “Item 3—Legal Proceedings” and “Notes
to Consolidated Financial Statements—Note 19, Commitments and Contingencies.”
RISKS RELATING TO OUR INDUSTRY
Changes in general market and economic conditions in the United States and abroad may adversely affect
our financial condition and results of operations.
Our financial condition and results of operations may be adversely affected by changes in general market and
economic conditions in the United States and abroad. These conditions include short-term and long-term
interest rates, the value of the U.S. dollar as compared to foreign currencies, fluctuations in both the debt and
equity capital markets, employment growth and unemployment rates and the strength of the U.S. national
economy and local economies. These conditions are beyond our control, and may change suddenly and
dramatically.
Changes in market and economic conditions could adversely affect us in many ways, including the following:
• fluctuations in the global debt and equity capital markets, including sudden and unexpected changes in
short-term or long-term interest rates, could decrease the fair value of our mortgage assets, derivatives
positions and other investments, negatively affect our ability to issue debt at attractive rates, and reduce
our net interest income; and
• an economic downturn or rising unemployment in the United States could decrease homeowner demand
for mortgage loans and increase the number of homeowners who become delinquent or default on their
mortgage loans. An increase in delinquencies or defaults would likely result in a higher level of credit
losses, which would adversely affect our earnings. Also, decreased homeowner demand for mortgage
loans could reduce our guaranty fee income, net interest income and the fair value of our mortgage assets.
An economic downturn could also increase the risk that our counterparties will default on their obligations
to us, increasing our liabilities and reducing our earnings.
A decline in U.S. housing prices or in activity in the U.S. housing market could negatively impact our
earnings and financial condition.
U.S. housing prices have risen significantly in recent years. As described above, this period of extraordinary
home price appreciation may have ended. The rate of home price appreciation has slowed, and we believe that
a modest decline in national home prices, on average, could occur in 2007. Declines in housing prices could
result in increased delinquencies or defaults on the mortgage loans we own or that back our guaranteed Fannie
Mae MBS. Further, a significant portion of mortgage loans made in recent years contain adjustable-rate terms
in which the interest rates are likely to increase dramatically after an initial period in which the rates are fixed.
A substantial number of these adjustable-rate mortgage loans are expected to reset in 2007 and 2008 and will
require significant increases in monthly payments, which also could lead to increased delinquencies or
defaults. In addition, the prevalence of loans made based on limited or no credit and income documentation
also increases the likelihood of future increases in delinquencies or defaults on mortgage loans. An increase in
delinquencies or defaults likely will result in a higher level of credit losses, which in turn will adversely affect
our earnings. In addition, housing price declines would reduce the fair value of our mortgage assets.
Our business volume is affected by the rate of growth in total U.S. residential mortgage debt outstanding and
the size of the U.S. residential mortgage market. Recently, the rate of growth in total U.S. residential mortgage
debt outstanding has slowed, a trend that could be exacerbated if recent increases in delinquencies and defaults
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