Fannie Mae 2007 Annual Report Download - page 162

Custodial Depository Institutions
A total of $32.5 billion and $34.5 billion in deposits for scheduled MBS payments were received and held by
324 and 347 custodial depository institutions in the months of December 2007 and 2006, respectively. Of
these amounts, 95% and 96% were held by institutions rated as investment grade by Standard & Poor’s,
Moody’s and Fitch as of December 31, 2007 and 2006, respectively. Our ten largest custodial depository
counterparties held 89% and 88% of these deposits as of December 31, 2007 and 2006, respectively.
We mitigate our risk to custodial depository institutions by establishing qualifying standards for these
counterparties, including minimum credit ratings, and limiting depositories to federally regulated or insured
institutions that are classified as well capitalized by their regulator. In addition, we have the right to withdraw
custodial funds at any time upon written demand or establish other controls, including requiring more frequent
remittances or setting limits on aggregate deposits with a custodian.
Due to the challenging market conditions in recent months, several of our custodial depository counterparties
have experienced ratings downgrades and liquidity constraints. In response, we have been reducing the
aggregate amount of our funds permitted to be held with these counterparties and requiring more frequent
remittances of funds. We have also begun the process of moving funds held with our largest counterparties
from custodial accounts to trust accounts that would provide more protection to us in the event of the
insolvency of a depository or servicer.
If a custodial depository institution were to fail while holding remittances of borrower payments of principal
and interest due to us in our custodial account, we would be an unsecured creditor of the depository and may
not be able to recover all of the principal and interest payments being held by the depository on our behalf, or
there may be a substantial delay in receiving these amounts. If this were to occur, we would be required to
replace these funds to make payments that are due to Fannie Mae MBS certificateholders. Accordingly, the
insolvency of one of our principal custodial depository counterparties could result in significant financial
losses to us and could therefore have a material adverse effect on our earnings, liquidity, financial condition
and capital position.
Issuers of Securities in our Liquid Investment Portfolio
Our liquid investment portfolio consists of cash and cash equivalents, funding agreements with our lenders,
including advances to lenders and repurchase agreements, asset-backed securities, corporate debt securities,
commercial paper and other non-mortgage related securities. Our counterparty risk is primarily with the
issuers of corporate debt and commercial paper, and financial institutions with short-term deposits.
As of December 31, 2007 and 2006, our liquid investment portfolio totaled $102.0 billion and $69.4 billion,
respectively, of which $68.0 billion and $29.2 billion were unsecured positions with issuers of corporate debt
securities or commercial paper, or short-term deposits with financial institutions. Of these amounts,
approximately 89% and 75% as of December 31, 2007 and 2006, respectively, were with issuers who had a
credit rating of AA (or its equivalent) or higher, based on the lowest of Standard & Poor’s, Moody’s or Fitch
ratings.
We mitigate our risk by restricting our liquid investments to high credit quality short- and medium-term
instruments, such as corporate floating rate notes, which are broadly traded in the financial markets. We
require the ratings of our liquid investments to be A- or better at acquisition. In addition, we limit the amounts
invested with issuers or financial institutions rated below A or its equivalent by Standard & Poor’s, Moody’s
or Fitch.
We monitor the credit risk position of our liquid investment portfolio by duration and rating level. In addition,
we monitor the financial position and any downgrades of these counterparties. The outcome of our monitoring
could result in a range of events, including selling some of these investments. If one of our primary liquid
investment portfolio counterparties fails to meet its obligations to us under the terms of the securities, it could
result in financial losses to us and have a material adverse effect on our earnings, liquidity, financial condition
and capital position.
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