Fannie Mae 2006 Annual Report Download - page 39

We depend on our institutional counterparties to provide services that are critical to our business, and our
earnings and liquidity may be reduced if one or more of our institutional counterparties defaults in its
obligations to us.
We face the risk that one or more of 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. In
some cases, our business with institutional counterparties is heavily concentrated. As of December 31, 2006,
our ten largest single-family mortgage servicers serviced 73% of our single-family mortgage credit book of
business, and Countrywide Financial Corporation, which is our largest single-family mortgage servicer,
serviced 22% of our single-family mortgage credit book of business. Also, as of December 31, 2006, we had
outstanding transactions with 21 interest rate and foreign currency derivatives counterparties, of which seven
counterparties accounted for approximately 78% of the total outstanding notional amount of our derivatives
contracts. Each of these seven counterparties accounted for between approximately 6% and 16% of the year-
end 2006 total outstanding notional amount. Further, as of December 31, 2006, our ten largest depository
counterparties held 88% of the $34.5 billion in deposits held by all of our depository counterparties for
scheduled MBS payments. In addition, we anticipate that consolidations may occur within the mortgage or
other industries that are significant to our business, which would further increase our concentration risk to
individual counterparties. Some of our counterparties also may become subject to serious liquidity problems
affecting, either temporarily or permanently, the viability of their business plans due to mortgage repurchase
obligations, margin calls, or lack of market access to regular sources of funding, which likely would adversely
affect their ability to meet their obligations to us. 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 ability to conduct our operations efficiently and at cost-effective rates, which in turn could
adversely affect our results of operations and our financial condition.
We have several key lender customers, and the loss of business volume from any one of these customers
could adversely affect our business and result in a decrease in our market share and earnings.
Our ability to generate revenue from the purchase and securitization of mortgage loans depends on our ability
to acquire a steady flow of mortgage loans from the originators of those loans. We acquire a significant
portion of our mortgage loans from several large mortgage lenders. For 2006 and for the first six months of
2007, our top five lender customers of single-family mortgage loans accounted for approximately 51% and
57%, respectively, of our single-family business volume, and the top five lender customers of multifamily
mortgage loans accounted for approximately 50% and 53%, respectively, of our multifamily business volume
during those periods. In addition, during 2006 and during the first six months of 2007, our largest lender
customer of single-family mortgage loans accounted for approximately 26% and 31%, respectively, of our
single-family business volume, and our largest lender customer of multifamily mortgage loans accounted for
approximately 16% and 20%, respectively, of our multifamily business volume during those periods.
Accordingly, maintaining our current business relationships and business volumes with our top lender
customers is critical to our business. During the recent disruption in the subprime market, a number of lenders
began to originate fewer mortgage loans. If any of our key lender customers significantly reduces the volume
of mortgage loans that the lender delivers to us or that we are willing to buy from them, we could lose
significant business volume that we might be unable to replace. The loss of business from any one of our key
lender customers could adversely affect our business and result in a decrease in our market share and earnings.
In addition, a significant reduction in the volume of mortgage loans that we securitize, whether resulting from
a decrease in the volume of mortgage loans available to us from lenders or from our inability to purchase
loans as a result of the limit on the size of our portfolio, could reduce the liquidity of Fannie Mae MBS,
which in turn could have an adverse effect on their market value.
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