Fannie Mae 2007 Annual Report Download - page 272

Mortgage Insurers. We had primary and pool mortgage insurance coverage on single-family mortgage loans
in our portfolio or backing our Fannie Mae MBS totaling $93.7 billion and $10.4 billion, respectively, as of
December 31, 2007, compared with $68.0 billion and $7.5 billion, respectively, as of December 31, 2006.
Seven mortgage insurance companies provided over 99% of our mortgage insurance as of both December 31,
2007 and 2006. In 2007, four of our seven primary mortgage insurer counterparties had their external ratings
for claims paying ability or insurer financial strength downgraded by one or more of the national rating
agencies.
If a mortgage insurer fails to meet its obligations to reimburse us for claims under insurance policies, we
would experience higher credit losses, which could have a material adverse effect on our earnings, liquidity,
financial condition and capital position.
Financial Guarantors. We were the beneficiary of financial guaranties of approximately $11.8 billion and
$12.3 billion on the securities held in our investment portfolio as of December 31, 2007 and 2006,
respectively. The securities covered by these guaranties consist primarily of private-label mortgage-related
securities and municipal bonds. We obtained these guaranties from nine financial guaranty insurance
companies. These financial guaranty contracts assure the collectability of timely interest and ultimate principal
payments on the guaranteed securities if the cash flows generated by the underlying collateral are not
sufficient to fully support these payments.
During 2007, three of our financial guarantor counterparties had their external ratings for claims paying ability
or insurer financial strength downgraded by one or more of the national rating agencies. If a financial
guarantor fails to meet its obligations to us with respect to the securities for which we have obtained financial
guaranties, it could reduce the fair value of our mortgage-related securities and result in financial losses to us,
which could have a material adverse effect on our earnings, liquidity, financial condition and capital position.
Derivatives Counterparties. The risk associated with a derivative transaction is that a counterparty will
default on payments due, which could result in our having to acquire a replacement derivative from a different
counterparty at a higher cost or our being unable to find a suitable replacement. Our derivative credit exposure
relates principally to interest rate and foreign currency derivative contracts. Typically, we manage these
exposures by contracting with experienced counterparties that are rated A (or its equivalent) or better. These
counterparties consist of large banks, broker-dealers and other financial institutions that have a significant
presence in the derivatives market, most of which are based in the United States. To date, we have not
experienced a loss on a derivative transaction due to credit default by a counterparty.
We also manage our exposure to derivatives counterparties by requiring collateral to limit our counterparty
credit risk exposure. We have a collateral management policy with provisions for requiring collateral on
interest rate and foreign currency derivative contracts in net gain positions based upon the counterparty’s credit
rating. The collateral includes cash, U.S. Treasury securities, agency debt and agency mortgage-related
securities. Collateral posted to us is held and monitored daily by a third-party custodian. We analyze credit
exposure on our derivative instruments daily and make collateral calls as appropriate based on the results of
internal pricing models and dealer quotes.
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FANNIE MAE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)