Fannie Mae 2008 Annual Report Download - page 179

—Occupancy type. Mortgages on properties occupied by the borrower as a primary or secondary
residence tend to have lower credit risk than mortgages on investment properties.
—Credit score. Credit score is a measure often used by the financial services industry, including our
company, to assess borrower credit quality and the likelihood that a borrower will repay future
obligations as expected. A higher credit score typically indicates a lower degree of credit risk.
—Loan purpose. Loan purpose indicates how the borrower intends to use the funds from a mortgage
loan. Cash-out refinancings have a higher risk of default than either mortgage loans used for the
purchase of a property or other refinancings that restrict the amount of cash back to the borrower.
—Geographic concentration. Local economic conditions affect borrowers’ ability to repay loans and the
value of collateral underlying loans. Geographic diversification reduces mortgage credit risk.
—Loan age. We monitor year of origination and loan age, which is defined as the number of years since
origination. Statistically, the peak ages for default are currently from two to six years after origination.
However, we have seen higher early default rates for loans originated in 2006 and 2007, due to a higher
number of loans originated during these years with risk layering, which refers to loans with several
features that compound risk, such as loans with reduced documentation and higher risk loan product
types.
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