Fannie Mae 2006 Annual Report Download - page 26

short-term senior unsecured debt, qualifying subordinated debt and preferred stock, refer to
“Item 7—MD&A—Liquidity and Capital Management—Liquidity—Credit Ratings and Risk Ratings.”
Securitization Activities
Our Capital Markets group engages in two principal types of securitization activities:
• creating and issuing Fannie Mae MBS from our mortgage portfolio assets, either for sale into the
secondary market or to retain in our portfolio; and
• issuing structured Fannie Mae MBS for customers in exchange for a transaction fee.
Our Capital Markets group creates Fannie Mae MBS using mortgage loans and mortgage-related securities
that we hold in our investment portfolio, referred to as “portfolio securitizations.” We currently securitize a
majority of the single-family mortgage loans we purchase within the first month of purchase. Our Capital
Markets group may sell these Fannie Mae MBS into the secondary market or may retain the Fannie Mae MBS
in our investment portfolio. In addition, the Capital Markets group issues structured, or multi-class, Fannie
Mae MBS. The structured Fannie Mae MBS are generally created through swap transactions, typically with
our lender customers or securities dealer customers. In these transactions, the customer “swaps” a mortgage-
related security they own for a structured Fannie Mae MBS we issue. This process is referred to as
“resecuritization.” Our Capital Markets group earns transaction fees for issuing structured Fannie Mae MBS
for third parties.
RISK MANAGEMENT
Risk is an inherent part of our business activities. Our risk management framework and governance structure
is intended to provide comprehensive controls and ongoing management of the major risks inherent in our
business activities. Our ability to properly identify, measure, monitor and report risk is critical to our
soundness and profitability. Our businesses expose us to the following four major categories of risk:
•Credit Risk. Credit risk is the risk of financial loss resulting from the failure of a borrower or
institutional counterparty to honor its contractual obligations to us and exists primarily in our mortgage
credit book of business, derivatives portfolio and liquid investment portfolio.
•Market Risk. Market risk represents the exposure to potential changes in the market value of our net
assets from changes in prevailing market conditions. A significant market risk we face and actively
manage is interest rate risk—the risk of changes in our long-term earnings or in the value of our net
assets due to changes in interest rates.
•Operational Risk. Operational risk relates to the risk of loss resulting from inadequate or failed internal
processes, people or systems, or from external events.
•Liquidity Risk. Liquidity risk is the risk to our earnings and capital arising from an inability to meet our
cash obligations in a timely manner.
For a complete discussion of our methods for managing risk, refer to “Item 7—MD&A—Risk Management.”
COMPETITION
Our competitors include the Federal Home Loan Mortgage Corporation, referred to as Freddie Mac, the
Federal Home Loan Banks, financial institutions, securities dealers, insurance companies, pension funds,
investment funds, and other investors.
We compete to purchase mortgage assets for our investment portfolio or to securitize them into Fannie Mae
MBS. Our market share of mortgage assets purchased for our investment portfolio or securitized into Fannie
Mae MBS is affected by the amount of residential mortgage loans offered for sale in the secondary market by
loan originators and other market participants. The decreased rate of growth in U.S. residential mortgage debt
outstanding in 2006 and continuing into 2007 has decreased the supply of mortgage originations, available for
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