Fannie Mae 2006 Annual Report Download - page 47

geographic concentration in California, a major earthquake or other disaster in that state could lead to
significant increases in delinquency rates and credit losses.
The contingency plans and facilities that we have in place may be insufficient to prevent a disruption in the
infrastructure that supports our business and the communities in which we are located from having an adverse
effect on our ability to conduct business. Potential disruptions may include those involving electrical,
communications, transportation and other services we use or that are provided to us. Substantially all of our
senior management and investment personnel work out of our offices in the Washington, DC metropolitan
area. If a disruption occurs and our senior management or other employees are unable to occupy our offices,
communicate with other personnel or travel to other locations, our ability to service and interact with each
other and with our customers may suffer, and we may not be successful in implementing contingency plans
that depend on communication or travel.
RISKS RELATING TO OUR INDUSTRY
A continuing, or broader, decline in U.S. home prices or in activity in the U.S. housing market could
negatively impact our earnings and financial condition.
U.S. home prices rose significantly in recent years. This period of extraordinary home price appreciation has
ended. By many measures, prices have declined in 2007, and we expect that they will continue to decline for
the remainder of this year and in 2008. Declines in home prices are likely to result in increased delinquencies
or defaults on the mortgage assets we own or that back our guaranteed Fannie Mae MBS. In addition, home
price declines would reduce the fair value of our mortgage assets. Further, a significant portion of mortgage
loans made in recent years contain adjustable-rate terms in which the interest rates are likely to increase
periodically throughout the term of the loan or after an initial period in which the rates are fixed. Many ARMs
are expected to reset during the remainder of 2007 and 2008 and are expected to require increases in monthly
payments, which may lead to increased delinquencies or defaults. In addition, the prevalence of loans made
based on limited or no credit or 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 reduce our earnings.
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 sharply in response to the reduced activity in the housing market and national
declines in home prices. This trend could be exacerbated if recent increases in mortgage delinquencies and
defaults continue. A decline in this growth rate reduces the number of mortgage loans available for us to
purchase or securitize, which in turn could lead to a reduction in our net interest income and guaranty fee
income. In addition, spreads have expanded in all sectors of the mortgage market, including in the fixed-rate
agency MBS market, resulting in at least some price deterioration. This, in turn, has affected the liquidity of
many lenders, including lenders that primarily offered only prime mortgage loans. If liquidity issues continue,
or increase, the amount of U.S. residential mortgage debt outstanding may decrease, perhaps significantly,
which would adversely affect our earnings and could adversely affect the liquidity of our Fannie Mae MBS.
Changes in general market and economic conditions in the U.S. 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 U.S. and abroad. These conditions include short-term and long-term interest rates,
the value of the U.S. dollar compared with the value of 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 in the U.S. and economies of other countries with investors that hold our debt.
These conditions are beyond our control, and may change suddenly and dramatically.
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