Fannie Mae 2007 Annual Report Download - page 237

housing for low- and moderate-income families. Additionally, we issue long-term standby commitments that
require us to purchase loans from lenders if the loans meet certain delinquency criteria.
We record a guaranty obligation for (i) guaranties on lender swap transactions issued or modified on or after
January 1, 2003, pursuant to FIN 45, (ii) guaranties on portfolio securitization transactions, (iii) credit
enhancements on mortgage revenue bonds, and (iv) our obligation to absorb losses under long-term standby
commitments. Our guaranty obligation represents our estimated obligation to stand ready to perform on these
guaranties. Our guaranty obligation is recorded at fair value at inception. The carrying amount of the guaranty
obligation, excluding deferred profit, was $11.1 billion and $6.5 billion as of December 31, 2007 and 2006,
respectively. We also record an estimate of incurred credit losses on these guaranties in “Reserve for guaranty
losses” in the consolidated balance sheets, as discussed further in “Note 4, Allowance for Loan Losses and
Reserve for Guaranty Losses.”
These guaranties expose us to credit losses on the mortgage loans or, in the case of mortgage-related
securities, the underlying mortgage loans of the related securities. The contractual terms of our guaranties
range from 30 days to 30 years. However, the actual term of each guaranty may be significantly less than the
contractual term based on the prepayment characteristics of the related mortgage loans. For those guaranties
recorded in the consolidated balance sheets, our maximum potential exposure under these guaranties is
primarily comprised of the unpaid principal balance of the underlying mortgage loans, which was $2.1 trillion
and $1.7 trillion as of December 31, 2007 and 2006, respectively. In addition, we had exposure of
$206.5 billion and $254.6 billion for other guaranties not recorded in the consolidated balance sheets as of
December 31, 2007 and 2006, respectively. Refer to “Note 18, Concentrations of Credit Risk” for further
details on these guaranties. The maximum number of interest payments we would make with respect to each
delinquent mortgage loan pursuant to these guaranties is typically 24 because generally we are contractually
required to purchase a loan from an MBS trust when the loan is 24 months past due. Further, we expect that
the number of interest payments that we would be required to make would be less than 24 to the extent that
loans are either purchased earlier than the mandatory purchase date or are foreclosed upon prior to 24 months
of delinquency.
The maximum exposure from our guaranties is not representative of the actual loss we are likely to incur,
based on our historical loss experience. In the event we were required to make payments under our guaranties,
we would pursue recovery of these payments by exercising our rights to the collateral backing the underlying
loans and through available credit enhancements, which includes all recourse with third parties and mortgage
insurance. The maximum amount we could recover through available credit enhancements and recourse with
third parties on guaranties recorded in the consolidated balance sheets was $118.5 billion and $99.4 billion as
of December 31, 2007 and 2006, respectively. The maximum amount we could recover through available
credit enhancements and recourse with all third parties on other guaranties not recorded in the consolidated
balance sheets was $22.7 billion and $28.8 billion as of December 31, 2007 and 2006, respectively.
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FANNIE MAE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)