Fannie Mae 2006 Annual Report Download - page 145

Of the conventional single-family problem loans that are resolved through modification, long-term forbearance
or repayment plans, our performance experience after 36 months following the inception of these types of
plans, based on the period 1999 to 2003, has been that approximately 66% of these loans remain current or
have been paid in full. Approximately 12% of these loans were terminated through foreclosure. The remaining
loans continue in a delinquent status.
Housing and Community Development
When a multifamily loan does not perform, we work with our loan servicers to minimize the severity of loss
by taking appropriate loss mitigation steps. We permit our multifamily servicers to pursue various options as
an alternative to foreclosure, including modifying the terms of the loan, selling the loan, and preforeclosure
sales. The resolution strategy depends in part on the borrower’s level of cooperation, the performance of the
market or submarket, the value of the property, the condition of the property, any remaining equity in the
property and the borrower’s ability to provide additional equity for the property. The unpaid principal balance
of modified multifamily loans totaled $84 million, $165 million and $224 million for the years ended
December 31, 2006, 2005, and 2004, respectively, which represented 0.06%, 0.13% and 0.18% of our total
multifamily mortgage credit book of business as of the end of each respective period.
Our risk exposure related to our LIHTC investments is limited to the amount of our investment and the
possible recapture of the tax benefits we have received from the partnership. When a non-guaranteed LIHTC
investment does not perform, we work with our syndicator partner. The resolution strategy depends on:
• the local general partner’s ability to meet obligations;
• the value of the property;
• the ability to restructure the debt;
• the financial and workout capacity of the syndicator partner; and
• the strength of the market or submarket.
If a guaranteed LIHTC investment does not perform, the guarantor remits funds to us in an amount that
provides us with the return provided for in the guaranty contract. Our risk in this situation is that the guarantor
will not perform. Refer to “Institutional Counterparty Credit Risk Management” below for a discussion of how
we manage the credit risk associated with our counterparties.
Mortgage Credit Book Performance
Key metrics used to measure credit risk in our mortgage credit book of business and evaluate credit
performance include (i) the serious delinquency rate, (ii) nonperforming loans, (iii) foreclosure activity, and
(iv) credit losses.
Serious Delinquency
The serious delinquency rate is an indicator of potential future foreclosures, although most loans that become
seriously delinquent do not result in foreclosure. The rate at which new loans become seriously delinquent and
the rate at which existing seriously delinquent loans are resolved significantly affect the level of future credit
losses. Home price appreciation decreases the risk of default because a borrower with enough equity in a
home generally can sell the home or draw on equity in the home to avoid foreclosure. The presence of credit
enhancements mitigates credit losses caused by defaults.
We classify single-family loans as seriously delinquent when a borrower has missed three or more consecutive
monthly payments, and the loan has not been brought current or extinguished through foreclosure, payoff or
other resolution. A loan referred to foreclosure but not yet foreclosed is also considered seriously delinquent.
Loans that are subject to a repayment plan are classified as seriously delinquent until the borrower has missed
fewer than three consecutive monthly payments. We classify multifamily loans as seriously delinquent when
payment is 60 days or more past due.
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