Fannie Mae 2007 Annual Report Download - page 142

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liquidity and operational risk committees provide oversight of the business units and are responsible for
establishing risk tolerance policies, monitoring performance against our risk management strategies and risk
limits, and identifying and assessing potential issues. We also have a Chief Risk Office that is responsible for
establishing our overall risk governance structure and providing independent evaluation and oversight of our
risk management activities. Our Board of Directors, through the Risk Policy and Capital Committee, provides
additional risk management oversight.
Our Internal Audit group provides an objective assessment of the design and execution of our internal control
system, including our management systems, our risk governance, and our policies and procedures. Our Office
of Compliance and Ethics is responsible for overseeing our compliance activities and coordinating our
OFHEO and HUD regulatory reporting and examinations; and managing our data privacy and anti-fraud
efforts.
Credit Risk Management
We are generally subject to two types of credit risk: mortgage credit risk and institutional counterparty credit risk.
We discuss how we manage mortgage credit risk in the section below, and we discuss how we manage institutional
counterparty risk beginning on page 136. We also discuss measures that we use to assess our credit risk exposure.
Mortgage Credit Risk Management
Mortgage credit risk is the risk that a borrower will fail to make required mortgage payments. We are exposed
to credit risk on our mortgage credit book of business because we either hold the mortgage assets or have
issued a guaranty in connection with the creation of Fannie Mae MBS backed by mortgage assets. Our
mortgage credit book of business consists of the following on-and off-balance sheet arrangements:
single-family and multifamily mortgage loans held in our portfolio;
Fannie Mae MBS and non-Fannie Mae mortgage-related securities held in our portfolio;
Fannie Mae MBS held by third-party investors; and
credit enhancements that we provide on mortgage assets.
We provide additional information regarding our off-balance sheet arrangements in “Off-Balance Sheet
Arrangements and Variable Interest Entities” above.
Factors affecting credit risk on loans in our single-family mortgage credit book of business include the
borrower’s financial strength and credit profile; the type of mortgage; the value and characteristics of the
property securing the mortgage; and economic conditions, such as changes in employment and home prices.
Factors that affect credit risk on a multifamily loan include the structure of the financing; the type and
location of the property; the condition and value of the property; the financial strength of the borrower and
lender; market and sub-market trends and growth; and the current and anticipated cash flows from the
property. These and other factors affect both the amount of expected credit loss on a given loan and the
sensitivity of that loss to changes in the economic environment.
Recent Developments
We closely monitor housing and economic market conditions and loan performance to manage and evaluate
our credit risks, adjusting our eligibility requirements and pricing as necessary to ensure that we are
appropriately compensated for risk. We have taken several specific steps to address the impact of the
significant home price depreciation experienced in some areas of the country, including the following:
Reinstituted our policy of limiting the maximum financing available on declining markets, which became
effective in January 2008. This policy restricts the maximum LTV ratio for properties located within a
declining market to five percentage points less than the maximum permitted for a particular mortgage
loan. For example, if the highest LTV allowed for a particular mortgage loan is 100%, the maximum
financing allowed would be only 95% if the property was located in a declining market.
120