Fannie Mae 2006 Annual Report Download - page 309

15% and 16% of our single-family mortgage credit book of business, respectively. We reduce our risk
associated with these loans through credit enhancements as described below under mortgage insurers.
Subprime loans represented approximately 2% and 3% of our single-family mortgage credit book of business
as of December 31, 2006 and 2005, respectively, which consisted of subprime mortgage loans or structured
Fannie Mae MBS backed by subprime mortgage loans and private-label mortgage-related securities backed by
subprime mortgage loans and, to a lesser extent, resecuritizations of private-label mortgage-related securities
backed by subprime mortgage loans.
Mortgage Insurers. The primary credit risk associated with mortgage insurers is that they will fail to fulfill
their obligations to reimburse us for claims under insurance policies. We were the beneficiary of primary
mortgage insurance coverage on $272.1 billion and $263.1 billion of single-family loans in our portfolio or
underlying Fannie Mae MBS as of December 31, 2006 and 2005, respectively. We were also the beneficiary of
pool mortgage insurance coverage on $106.6 billion and $71.7 billion of single-family loans, including
conventional and government loans, in our portfolio or underlying Fannie Mae MBS as of December 31, 2006
and 2005, respectively. Seven mortgage insurance companies, all rated AA (or its equivalent) or higher by
Standard & Poor’s, Moody’s or Fitch, provided over 99% of the total coverage as of December 31, 2006 and
2005.
Mortgage Servicers. The primary risk associated with mortgage servicers is that they will fail to fulfill their
servicing obligations. Mortgage servicers collect mortgage and escrow payments from borrowers, pay taxes
and insurance costs from escrow accounts, monitor and report delinquencies, and perform other required
activities on our behalf. A servicing contract breach could result in credit losses for us, and we could incur the
cost of finding a replacement servicer, which could be substantial for loans that require a special servicer. Our
ten largest single-family mortgage servicers serviced 73% and 72% of our single-family mortgage credit book
of business as of December 31, 2006 and 2005, respectively. Our ten largest multifamily mortgage servicers
serviced 73% and 69% of our multifamily mortgage credit book of business as of December 31, 2006 and
2005, respectively.
Derivatives Counterparties. The primary credit exposure we have on a derivative transaction is that a
counterparty will default on payments due, which could result in our having to acquire a replacement
derivative from a different counterparty at a higher cost.
We typically manage this credit risk by contracting with experienced counterparties that are rated A (or its
equivalent) or better, spreading the credit risk among many counterparties and placing contractual limits on the
amount of unsecured credit extended to any single counterparty. We enter into master agreements that provide
for netting of amounts due to us and amounts due to counterparties under those agreements, which reduces our
exposure to a single counterparty in the event of default.
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FANNIE MAE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)