Fannie Mae 2007 Annual Report Download - page 47

as a whole or in specific regions of the country, would significantly increase the level of our delinquencies and
credit losses. Increases in our credit-related expenses would reduce our earnings and adversely affect our
capital position and financial condition.
We may experience further write-downs and losses relating to our investment securities due to volatile and
illiquid market conditions, which could adversely affect our earnings, liquidity, capital position and
financial condition.
During 2007, we experienced an increase in losses on trading securities and in unrealized losses on available-
for-sale securities due to a significant widening of credit spreads. Our net losses on trading securities totaled
$365 million in 2007. In addition, we recorded $814 million in other-than-temporary impairment on available-
for-sale securities in 2007. Of this amount, $160 million related to other-than-temporary impairment on our
investments in subprime private-label securities. We also recorded in accumulated other comprehensive income
(“AOCI”) an additional $3.3 billion in unrealized losses on Alt-A and subprime private-label securities
classified as available-for-sale. We have not recognized other-than-temporary impairment with respect to these
securities because we believe it is probable we will collect all of the contractual amounts due and we currently
have the intent and ability to hold these securities until they recover their value or until maturity. As market
conditions continue to evolve, however, the fair value of these securities could decline further. The credit
ratings of some of the subprime and Alt-A private-label securities held in our portfolio have been downgraded
or placed under review for possible downgrade in recent months. Mortgage loan delinquencies and credit
losses have also increased in recent months, particularly in the subprime and Alt-A sectors. If, in the future,
we determine that additional subprime and Alt-A private-label securities classified as available-for-sale and in
unrealized loss positions have become other-than-temporarily impaired, or if we change our investment intent
with respect to these securities and no longer expect to hold the securities until they recover their value or
until maturity, we would experience further significant losses or other-than-temporary impairment relating to
these securities. See “Part II—Item 7—MD&A—Consolidated Balance Sheet Analysis—Investments in Alt-A
and Subprime Mortgage-Related Securities” for more detailed information on our investments in private-label
securities backed by subprime and Alt-A loans.
The significant widening of credit spreads that has occurred since July 2007 also could further reduce the fair
value of our other investment securities, particularly those securities that are less liquid and more subject to
volatility, such as commercial mortgage-backed securities and mortgage revenue bonds. As a result, we also
could experience further significant losses or other-than-temporary impairment on other investment securities
in our mortgage portfolio or our liquid investment portfolio.
In addition, market illiquidity has increased the amount of management judgment required to value certain of
our securities. Subsequent valuations, in light of factors then prevailing, may result in significant changes in
the value of our investment securities in the future. If we decide to sell any of these securities, the price we
ultimately realize will depend on the demand and liquidity in the market at that time and may be materially
lower than their current fair value. Any of these factors could require us to take further write-downs in the
value of our investment portfolio, which would have an adverse effect on our earnings, liquidity, capital
position and financial condition in the future.
Continued declines in our earnings would have a negative effect on our regulatory capital position.
We are required to meet various capital standards, including a requirement that our core capital equal or
exceed both our statutory minimum capital requirement and a higher OFHEO-directed minimum capital
requirement. Our retained earnings are a component of our core capital. Accordingly, the level of our core
capital can fluctuate significantly depending on our financial results. We recorded a net loss of $2.1 billion in
2007. We expect some or all of the market conditions that contributed to this loss to continue and therefore to
continue to adversely affect our earnings and, as a result, the amount of our core capital. In order to continue
to meet our statutory and OFHEO-directed minimum capital requirements, we may be required to take actions,
or refrain from taking actions, to ensure that we maintain or increase our core capital. These actions have
included, and in the future may include, reducing the size of our investment portfolio through liquidations or
by selling assets at a time when we believe that it would be economically advantageous to continue to hold
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