Fannie Mae 2007 Annual Report Download - page 28

We issue both single-class and multi-class Fannie Mae MBS. Single-class Fannie Mae MBS refers to Fannie
Mae MBS where the investors receive principal and interest payments in proportion to their percentage
ownership of the MBS issue. Multi-class Fannie Mae MBS refers to Fannie Mae MBS, including real estate
mortgage investment conduits (“REMICs”), where the cash flows on the underlying mortgage assets are
divided, creating several classes of securities, each of which represents a beneficial ownership interest in a
separate portion of cash flows. By separating the cash flows, the resulting classes may consist of: (1) interest-
only payments; (2) principal-only payments; (3) different portions of the principal and interest payments; or
(4) combinations of each of these. Terms to maturity of some multi-class Fannie Mae MBS, particularly
REMIC classes, may match or be shorter than the maturity of the underlying mortgage loans and/or mortgage-
related securities. As a result, each of the classes in a multi-class Fannie Mae MBS may have a different
coupon rate, average life, repayment sensitivity or final maturity. We also issue structured Fannie Mae MBS,
which are multi-class Fannie Mae MBS or single-class Fannie Mae MBS that are resecuritizations of other
single-class Fannie Mae MBS.
MBS Trusts
Single-Family Master Trust Agreement
Each of our single-family MBS trusts formed on or after June 1, 2007 is governed by the terms of our single-
family master trust agreement. Each of our single-family MBS trusts formed prior to June 1, 2007 is governed
either by our fixed-rate or adjustable-rate trust indenture. In addition, each MBS trust, regardless of the date of
its formation, is governed by an issue supplement documenting the formation of that MBS trust and the
issuance of the Fannie Mae MBS by that trust. The master trust agreement or the trust indenture, together with
the issue supplement and any amendments, are the “trust documents” that govern an individual MBS trust.
Optional and Required Purchases of Mortgage Loans from Single-Family MBS Trusts
In accordance with the terms of our single-family MBS trust documents, we have the option or the obligation,
in some instances, to purchase specified mortgage loans from an MBS trust. Our acquisition cost for these
loans is the unpaid principal balance of the loan plus accrued interest.
Optional Purchases
Under our single-family trust documents, we have the right, but are not required, to purchase a mortgage loan
from an MBS trust under a variety of circumstances. When we elect to purchase a mortgage loan or real-estate
owned (“REO”) property from an MBS trust, we primarily do so in one of the following four situations:
• four or more consecutive monthly payments due under the loan are delinquent in whole or in part;
• there is a material breach of a representation and warranty made in connection with the transfer or sale of
the mortgage loan to us;
• the mortgaged property is acquired by the trust as REO property; or
• the borrower transfers or proposes to transfer the mortgaged property and the transfer is not permitted by
an enforceable “due-on-transfer” or “due-on-sale” provision without full payment of the mortgage loan.
We generally exercise our contractual option to purchase a mortgage loan from an MBS trust when we believe
the benefit to us of owning the loan exceeds the benefit of leaving the loan in the trust. In deciding whether
and when to purchase a loan from an MBS trust, we consider a variety of factors. In general, these factors
include: our loss mitigation strategies and the exposure to credit losses we face under our guaranty; our cost of
funds; the effect that a purchase will have on our capital; relevant market yields; the administrative costs
associated with purchasing and holding the loan; mission and policy considerations; counterparty exposure to
lenders that have agreed to cover losses associated with delinquent loans; general market conditions; our
statutory obligations under our Charter Act; and other legal obligations such as those established by consumer
finance laws. We may also purchase loans from an MBS trust, using the optional purchase provision relating
to delinquent payments, as necessary to ensure compliance with provisions of the trust documents. Refer to
“Part II—Item 7—MD&A—Critical Accounting Policies and Estimates” and “Part II—Item 7—MD&A—
6