Fannie Mae 2007 Annual Report Download - page 159

counterparties, implementing new limits on the amount of business we will enter into with some of our higher
risk counterparties, and increasing the frequency and depth of our counterparty monitoring.
Mortgage Servicers
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. Our
business with our mortgage servicers is concentrated. Our ten largest single-family mortgage servicers serviced
74% and 73% of our single-family mortgage credit book of business as of December 31, 2007 and 2006,
respectively. Countrywide Financial Corporation and its affiliates, our largest single-family mortgage servicer,
serviced 23% and 22% of our single-family mortgage credit book of business as of December 31, 2007 and
2006, respectively. Our ten largest multifamily servicers serviced 72% and 73% of our multifamily mortgage
credit book of business as of December 31, 2007 and 2006, respectively. The largest multifamily mortgage
servicer serviced 18% and 14% of our multifamily mortgage credit book of business as of December 31, 2007
and 2006, respectively.
We have minimum standards and financial requirements for mortgage servicers. For example, we require
servicers to maintain a sufficient level of servicing fees to reasonably compensate a replacement servicer in
the event of a servicing contract breach. In addition, we perform periodic on-site and financial reviews of our
servicers and monitor their financial and portfolio performance as compared to peers and internal benchmarks.
We work with our largest servicers to establish performance goals and report performance against the goals,
and our servicing consultants work with servicers to improve servicing results and compliance with our
servicing guide.
Due to the challenging market conditions in recent months, several of our mortgage servicers have
experienced ratings downgrades and liquidity constraints, including our largest mortgage servicer. In addition,
the number of delinquent mortgage loans serviced by our counterparties has increased in recent months and
will likely continue to increase due to the continued weakness in the housing and mortgage markets.
Managing a substantially higher volume of non-performing loans could create operational difficulties for our
servicers. The financial difficulties that a number of our mortgage servicers are currently experiencing,
coupled with growth in the number of delinquent loans on their books of business, may negatively affect the
ability of these counterparties to meet their obligations to us, including their ability to service mortgage loans
adequately and their ability to meet their obligations to repurchase delinquent mortgages due to a breach of
the representations and warranties they provided upon delivery of the mortgages to us.
If one of our principal mortgage servicers fails to meet its obligations to us, it could increase our credit-related
expenses and credit losses, result in financial losses to us and have a material adverse effect on our earnings,
liquidity and financial condition. Moreover, we may not be able to find a suitable replacement servicer. In
addition, if a mortgage servicer were to become insolvent, we would not have the ability to immediately move
the servicing to a replacement servicer of our choice if we determine the quality of servicing is deteriorating.
In addition, the servicer could attempt to transfer servicing of our loans to a replacement servicer that is not a
Fannie Mae-approved servicer and without requiring that selling representations and warranties be undertaken
by the replacement servicer. In addition, we may not be able to obtain, or could be delayed in obtaining, all of
the principal and interest payments being held by the servicer on our behalf.
Third-Party Providers of Credit Enhancement
We use several types of credit enhancement to manage our mortgage credit risk, including primary and pool
mortgage insurance, risk sharing agreements with lenders, and financial guaranty contracts. Our maximum
potential loss recovery under our primary and pool mortgage insurance on single-family mortgage loans, risk
sharing agreements with lenders relating to both single-family and multifamily loans, and financial guaranty
contracts was an estimated $190.8 billion as of December 31, 2007, compared with $185.5 billion as of
December 31, 2006. As discussed in more detail below, if one of these mortgage insurers, lenders or financial
guarantors fails to fulfill its obligations to us with respect to the mortgage loans or mortgage-related securities
we hold in our mortgage portfolio or the mortgage assets underlying our guaranteed Fannie Mae MBS, it
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