Fannie Mae 2008 Annual Report Download - page 193

The severe housing market downturn and decline in home prices on a national basis have resulted in a higher
percentage of our mortgage loans that transition from delinquent to foreclosure status and a significant
reduction in the values of our foreclosed single-family properties. Our single-family foreclosure rate increased
to 0.52% during 2008, from 0.28% in 2007, reflecting a near doubling of the number of single-family
properties we acquired through foreclosure in 2008 relative to 2007. This substantial increase was attributable
to the impact of the housing and credit market crisis, including the continued decline in home prices
throughout much of the country, particularly in California, Florida, Arizona and Nevada, continued weak
economic conditions in the Midwest, particularly in Michigan and Ohio, and the overall economic downturn
during 2008. Our foreclosure activity was reduced in the fourth quarter of 2008 due in part to the suspension
of foreclosure acquisitions on occupied single-family properties scheduled to occur between November 26,
2008 and January 31, 2009.
We also experienced an increase in the number of multifamily properties acquired during 2008, reflecting the
impact of the deepening economic downturn.
As discussed in “Consolidated Results of Operations—Credit-Related Expenses,” we have experienced a
significant increase in our single-family default rates, particularly within certain states that have had
significant home price depreciation, for certain higher risk loan categories, such as Alt-A loans, and loans
originated in 2006 and 2007.
• California, Florida, Arizona and Nevada, which represented approximately 23% of the loans in our
conventional single-family mortgage credit book of business as of December 31, 2008, accounted for 27%
of single-family properties acquired through foreclosure in 2008, reflecting the sharp declines in home
prices that these states have experienced.
• The Midwest, which represented approximately 19% of the loans in our conventional single-family
mortgage credit book of business as of December 31, 2008, accounted for approximately 32% of the
single-family properties acquired through foreclosure in 2008, reflecting the continued impact of weak
economic conditions in this region.
• Alt-A mortgage loans held in our portfolio or backing Fannie Mae MBS, excluding resecuritized private-
label mortgage-related securities backed by Alt-A mortgage loans, represented approximately 10% of our
total single-family mortgage credit book of business as of December 31, 2008, but accounted for 31% of
single-family properties acquired through foreclosure in 2008.
During 2008, we significantly increased our REO sales staff as part of our efforts to sell our inventory of
foreclosed properties and the costs associated with these properties. We had an inventory of approximately
34,000 single-family properties at the beginning of 2008 and acquired approximately 95,000 properties during
the year. We disposed of approximately 65,000 properties in 2008.
Institutional Counterparty Credit Risk Management
We rely on our institutional counterparties to provide services and credit enhancements that are critical to our
business. Institutional counterparty risk is the risk that these institutional counterparties may fail to fulfill their
contractual obligations to us. We have exposure primarily to the following types of institutional counterparties:
• 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 portfolio loans
and MBS certificateholders;
• issuers of securities held in our cash and other investments portfolio;
• derivatives counterparties;
• mortgage originators and investors;
• debt security and mortgage dealers; and
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