Fannie Mae 2007 Annual Report Download - page 101

trusts. Although we have decreased the number of our optional loan purchases, the total number of loans
purchased from MBS trusts may increase in the future, which would result in an increase our SOP 03-3 fair
value losses. The total number of loans we purchase from MBS trusts is dependent on a number of factors,
including management decisions about appropriate loss mitigation efforts, the expected increase in loan
delinquencies within our MBS trusts resulting from the current adverse conditions in the housing market and
our need to preserve capital to meet our regulatory capital requirements. For example, we recently introduced
a new HomeSaver Advance
TM
initiative, which is a loss mitigation tool that we began implementing in the first
quarter of 2008. HomeSaver Advance provides qualified borrowers with an unsecured personal loan in an
amount equal to all past due payments relating to their mortgage loan, allowing borrowers to cure their
payment defaults under mortgage loans without requiring modification of their mortgage loans. By permitting
qualified borrowers to cure their payment defaults without requiring that we purchase the loans from the MBS
trusts in order to modify the loans, this loss mitigation tool may reduce the number of delinquent mortgage
loans that we purchase from MBS trusts in the future and the fair value losses we record in connection with
those purchases. The credit environment remains fluid, and the number of loans that we purchase from our
MBS trusts will continue to be affected by events and conditions that occur nationally and in regional markets,
as well as changes in our business practices to respond to the current adverse market conditions.
Credit Loss Performance Metrics
Our credit loss performance metrics include our historical credit losses and our credit loss ratio. Our credit
loss performance metrics are not defined terms within GAAP, and the method we use to calculate these
metrics may not be comparable to the method used to calculate similarly titled measures reported by other
companies. Management, however, views our credit loss performance metrics as significant indicators of the
effectiveness of our credit risk management strategies. Management uses these measures to evaluate our
historical credit loss performance, assess the credit quality of our existing guaranty book of business,
determine the level of our loss reserves and make determinations about our loss mitigation strategies.
Because management does not view changes in the fair value of our mortgage loans as credit losses, we
revised the presentation of our credit loss performance metrics to exclude SOP 03-3 fair value losses that have
not yet produced an economic loss, as described in our Quarterly Report on Form 10-Q for the quarter ended
September 30, 2007. If a loan subject to SOP 03-3 does not cure and we subsequently foreclose on the loan,
we include in our credit loss performance metrics the impact of any credit losses we experience on the loan as
a result of foreclosure. Because losses related to non-Fannie Mae mortgage-related securities are not reflected
in any of the components of our credit losses, we also revised the calculation of our credit loss ratio to reflect
credit losses as a percentage of our guaranty book of business, which excludes these securities. We previously
calculated our credit loss ratio based on our mortgage credit book of business, which includes non-Fannie Mae
mortgage-related securities that we hold in our mortgage portfolio but do not guarantee. We have revised prior
years to conform to the current period presentation.
Table 17 below details the components of our credit loss performance metrics for 2007, 2006 and 2005. Our
credit loss ratio excluding the effect of SOP 03-3 fair value losses was 5.3 basis points, 2.2 basis points and
1.1 basis points for 2007, 2006 and 2005, respectively. Our credit loss ratio including the effect of SOP 03-3
fair value losses would have been 9.8 basis points, 2.8 basis points and 2.0 basis points for those respective
years.
We believe that our credit loss performance metrics, calculated excluding the effect of SOP 03-3 fair value
losses, are useful to investors because they reflect how our management evaluates our credit risk management
strategies and credit performance. They also provide a consistent treatment of credit losses for on- and off-
balance sheet loans. Therefore, we believe these measures provide a meaningful indication of our credit losses
and the effectiveness of our credit risk management strategies and loss mitigation efforts. Moreover, by
presenting credit losses with and without the effect of SOP 03-3 fair value losses, which were not significant
until the disruption in the mortgage markets that began in July 2007, investors are able to evaluate our credit
performance on a more consistent basis among periods.
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