Fannie Mae 2008 Annual Report Download - page 199

Lenders with Risk Sharing
We enter into risk sharing agreements with lenders pursuant to which the lenders agree to bear all or some
portion of the credit losses on the covered loans. Our maximum potential loss recovery from lenders under
these risk sharing agreements on single-family loans was $24.2 billion and $31.8 billion as of December 31,
2008 and 2007, respectively. Our maximum potential loss recovery from lenders under these risk sharing
agreements on multifamily loans was $27.2 billion and $25.0 billion as of December 31, 2008 and 2007,
respectively.
The current financial market crisis has adversely affected, and is expected to continue to adversely affect, the
liquidity and financial condition of our lender counterparties. As a result, the percentage of single-family
recourse obligations to lenders with investment grade credit ratings (based on the lower of Standard & Poor’s,
Moody’s and Fitch ratings) decreased to 50% as of December 31, 2008 from 56% as of December 31, 2007.
The percentage of these recourse obligations to lender counterparties rated below investment grade increased
to 13% as of December 31, 2008, from 3% as of December 31, 2007. The remaining 36% and 41% of these
recourse obligations were to lender counterparties that were not rated by rating agencies as of December 31,
2008 and December 31, 2007, respectively.
Depending on the financial strength of the counterparty, we may require a lender to pledge collateral to secure
its recourse obligations. In addition, effective September 2008, we require that single-family lenders taking on
recourse obligations to us have a minimum credit rating of AA- (based on the lower of Standard & Poor’s,
Moody’s and Fitch ratings) or provide us with equivalent credit enhancement.
Financial Guarantors
We were the beneficiary of financial guarantees totaling approximately $10.2 billion and $11.8 billion as of
December 31, 2008 and 2007, respectively, on securities held in our investment portfolio or on securities that
have been resecuritized to include a Fannie Mae guaranty and sold to third parties. The securities covered by
these guarantees consist primarily of private-label mortgage-related securities and mortgage revenue bonds. We
obtained these guarantees from nine financial guaranty insurance companies. In addition, we are the
beneficiary of financial guarantees totaling approximately $43.5 billion and $41.9 billion as of December 31,
2008 and 2007, respectively, obtained from Freddie Mac, the Federal government and its agencies. These
financial guaranty contracts assure the collectability of timely interest and ultimate principal payments on the
guaranteed securities if the cash flows generated by the underlying collateral are not sufficient to fully support
these payments.
We manage our exposure to financial guarantors through in-depth analyses of their financial position and
stress analyses of their financial guarantees and available capital. Based on the outcome of our reviews, we
may, on a case-by-case basis, take a variety of actions that range from restricting the types of business we will
do with a company to suspending the company as an acceptable counterparty.
Eight of our nine financial guarantor counterparties had their insurer financial strength ratings downgraded by
one or more of the nationally recognized statistical rating organizations in 2008. These rating downgrades
have resulted in reduced liquidity and prices for our securities for which we have obtained financial
guarantees. These rating downgrades also imply an increased risk that these financial guarantors will fail to
fulfill their obligations to reimburse us for claims under their guaranty contracts. To date, none of our financial
guarantor counterparties has failed to repay us for claims under guaranty contracts; however, based on the
current stressed financial condition of some of our financial guarantor counterparties, we do not believe that
we can rely on all of our counterparties to repay us in full in the future. As described above under “Critical
Accounting Policies and Estimates—Other-than-temporary Impairment of Investment Securities,” we have
considered the financial strength of our financial guarantors in assessing a security for other-than-temporary
impairment. For the quarter and year ended December 31, 2008, we recognized other-than-temporary
impairments of $313 million and $533 million, respectively, related to our securities for which we had
obtained financial guarantees. We continue to monitor the effect that these rating actions and the financial
condition of our financial guarantor counterparties may have on the value of the securities in our investment
portfolio. Further downgrades in the ratings of our financial guarantor counterparties could result in a
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