Fannie Mae 2007 Annual Report Download - page 49

efficiently and at cost-effective rates, which in turn could materially adversely affect our earnings, liquidity,
capital position and financial condition. Refer to “Part II—Item 7—MD&A—Risk Management—Credit Risk
Management—Institutional Counterparty Credit Risk Management” for a detailed description of our business
concentrations with each type of counterparty.
We have several key lender customers, and the loss of business volume from any one of these customers
could adversely affect our business and result in a decrease in our market share and earnings.
Our ability to generate revenue from the purchase and securitization of mortgage loans depends on our ability
to acquire a steady flow of mortgage loans from the originators of those loans. We acquire a significant
portion of our mortgage loans from several large mortgage lenders. During 2007, our top five lender customers
accounted for approximately 56% of our single-family business volume. Accordingly, maintaining our current
business relationships and business volumes with our top lender customers is critical to our business. Some of
our lender customers are experiencing, or may experience in the future, liquidity problems that would affect
the volume of business they are able to generate. If any of our key lender customers significantly reduces the
volume or quality of mortgage loans that the lender delivers to us or that we are willing to buy from them, we
could lose significant business volume that we might be unable to replace, which could adversely affect our
business and result in a decrease in our market share and earnings. In addition, a significant reduction in the
volume of mortgage loans that we securitize could reduce the liquidity of Fannie Mae MBS, which in turn
could have an adverse effect on their market value.
Our largest lender customer, Countrywide Financial Corporation and its affiliates, accounted for approximately
28% of our single-family business volume during 2007. In January 2008, Bank of America Corporation
announced that it had reached an agreement to purchase Countrywide Financial Corporation. Together, Bank
of America and Countrywide accounted for approximately 32% of our single-family business volume in 2007.
We cannot predict at this time whether or when this merger will be completed and what effect the merger, if
completed, will have on our relationship with Countrywide and Bank of America. Following the merger, we
could lose significant business volume that we might be unable to replace, which could adversely affect our
business and result in a decrease in our earnings and market share.
Changes in option-adjusted spreads or interest rates, or our inability to manage interest rate risk
successfully, could have a material adverse effect on our earnings, liquidity, capital position and financial
condition.
We fund our operations primarily through the issuance of debt and invest our funds primarily in mortgage-
related assets that permit the mortgage borrowers to prepay the mortgages at any time. These business
activities expose us to market risk, which is the risk of loss from adverse changes in market conditions. Our
most significant market risks are interest rate risk and option-adjusted spread risk. Changes in interest rates
affect both the value of our mortgage assets and prepayment rates on our mortgage loans.
Option-adjusted spread risk is the risk that the option-adjusted spreads on our mortgage assets relative to those
on our funding and hedging instruments (referred to as the “OAS of our net mortgage assets”) may increase or
decrease. These increases or decreases may be a result of market supply and demand dynamics. A widening,
or increase, of the OAS of our net mortgage assets typically causes a decline in the fair value of the company
and a decrease in our earnings and capital. A narrowing, or decrease, of the OAS of our net mortgage assets
reduces our opportunities to acquire mortgage assets and therefore could have a material adverse effect on our
future earnings and financial condition. We do not attempt to actively manage or hedge the impact of changes
in the OAS of our net mortgage assets after we purchase mortgage assets, other than through asset monitoring
and disposition.
Changes in interest rates could have a material adverse effect on our earnings, liquidity, capital position and
financial condition. Our ability to manage interest rate risk depends on our ability to issue debt instruments
with a range of maturities and other features at attractive rates and to engage in derivative transactions. We
must exercise judgment in selecting the amount, type and mix of debt and derivative instruments that will
most effectively manage our interest rate risk. The amount, type and mix of financial instruments we select
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