Fannie Mae 2007 Annual Report Download - page 48

the assets, limiting or forgoing attractive opportunities to acquire or securitize assets, reducing or eliminating
our common stock dividend, and issuing additional preferred equity securities, which in general is a more
expensive method of funding our operations than issuing debt securities. We also may issue convertible
preferred securities or additional shares of common stock to maintain or increase our core capital, which we
expect would dilute the investment in the company of the existing holders of our common stock. These actions
also may reduce our future earnings.
We depend on our institutional counterparties to provide services that are critical to our business. If one or
more of our institutional counterparties defaults on its obligations to us or becomes insolvent, it could
materially adversely affect our earnings, liquidity, capital position and financial condition.
We face the risk that one or more of our institutional counterparties may fail to fulfill their contractual
obligations to us. Our primary exposures to institutional counterparty risk are with: mortgage servicers that
service the loans we hold in our investment portfolio or that back our Fannie Mae MBS; third-party providers
of credit enhancement on the mortgage assets that we hold in our investment portfolio or that back our Fannie
Mae MBS, including mortgage insurers, lenders with risk sharing arrangements, and financial guarantors;
custodial depository institutions that hold principal and interest payments for Fannie Mae MBS
certificateholders; issuers of securities held in our liquid investment portfolio; and derivatives counterparties.
Refer to “Part II—Item 7—MD&A—Risk Management—Credit Risk Management—Institutional Counterparty
Credit Risk Management” for a detailed description of the risk posed by each of these types of counterparties.
The challenging mortgage and credit market conditions have adversely affected, and will likely continue to
adversely affect, the liquidity and financial condition of a number of our institutional counterparties,
particularly those whose businesses are concentrated in the mortgage industry. One or more of these
institutions may default in its obligations to us for a number of reasons, such as changes in financial condition
that affect their credit ratings, a reduction in liquidity, operational failures or insolvency. Several of our
institutional counterparties have experienced ratings downgrades and liquidity constraints, including
Countrywide Financial Corporation and its affiliates, which is our largest lender customer and mortgage
servicer. These and other key institutional counterparties may become subject to serious liquidity problems
that, either temporarily or permanently, negatively affect the viability of their business plans or reduce their
access to funding sources. The financial difficulties that a number of our institutional counterparties are
currently experiencing may negatively affect the ability of these counterparties to meet their obligations to us
and the amount or quality of the products or services they provide to us. A default by a counterparty with
significant obligations to us could result in significant financial losses to us and could materially adversely
affect our ability to conduct our operations, which would adversely affect our earnings, liquidity, capital
position and financial condition.
Our business with many of our institutional counterparties is heavily concentrated, which increases the risk
that we could experience significant losses if one or more of our institutional counterparties defaults in its
obligations to us or becomes insolvent.
Our business with our lender customers, mortgage servicers, mortgage insurers, financial guarantors, custodial
depository institutions and derivatives counterparties is heavily concentrated. For example, ten single-family
mortgage servicers serviced 74% of our single-family mortgage credit book of business as of December 31,
2007. In addition, Countrywide Financial Corporation and its affiliates, our largest single-family mortgage
servicer, serviced 23% of our single-family mortgage credit book of business as of December 31, 2007. Also,
seven mortgage insurance companies provided over 99% of our total mortgage insurance coverage of
$104.1 billion as of December 31, 2007, and our ten largest custodial depository institutions held 89% of our
$32.5 billion in deposits for scheduled MBS payments in December 2007.
Moreover, many of our counterparties provide several types of services to us. For example, many of our lender
customers or their affiliates also act as mortgage servicers, custodial depository institutions and document
custodians for us. Accordingly, if one of these counterparties were to become insolvent or otherwise default on
its obligations to us, it could harm our business and financial results in a variety of ways. A default by any
counterparty with significant obligations to us could adversely affect our ability to conduct our operations
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